Investing in the stock market: trading or passive investing?

For many savers, investing in the stock market is considered something complicated that requires specialized knowledge to make money, and therefore reserved for professionals or a few enthusiasts who are ready to spend the necessary time on it.

This vision of the stockbroker, which we imagine with his eyes riveted on stock market prices, corresponds to a particular style of investment: trading. In fact, this investment method is very different from that of the majority of stock investors.

We will see why trading is an investment method that is not very suitable for individual savers and what strategy to follow to optimize the performance and management time of your investments in the stock market.

Trading: Time consuming and risky

Trading is a style of investment that consists of buying and selling stocks (or derivatives) with a short or very short-term investment horizon (from a few minutes to a few days).

This form of investment is an activity in itself because trading takes a lot of time. For good reasons, the investor must constantly follow developments in the financial markets, keep informed of the latest economic news and adjust his portfolio’s positions in real time. Trading also requires a good knowledge of macro and micro economics.

This investment method is difficult to imagine for individual investors. This is why only enthusiasts are ready to devote many hours to it. You have to choose the right stocks and buy and sell at the right time, which is very risky and stressful.

Ordinary savers who want to benefit from good results in the stock market can implement a much simpler and no less effective strategy for investing in the stock market: passive investment.

passive investment in the stock market

The principle of passive investing is based on holding the shares for a long time, which limits the number of necessary interventions on the part of the investor to manage his portfolio, while favoring investment in trackers (index funds, come back later).

Investing for the long term allows the saver to take advantage of tax-efficient savings schemes such as the Equity Savings Plan (PEA) and life insurance. On a PEA of more than 5 years or life insurance of more than 8 years, the saver can actually make withdrawals while enjoying reduced capital gains taxation. Only social contributions are levied on capital gains (taxation reduced to 17.2%). These are capitalization envelopes, that is, a sale with a capital gain does not trigger taxation (only withdrawals). Within PEA and life insurance, the investor can thus grow his savings, arbitrage between his investments and reinvest his earnings without tax friction. Capital works at full speed.

Conversely, short-term investments (trading), by multiplying transactions within a common securities account (CTO), allow no tax benefits. Dividends and capital gains are taxed at 30% (the flat tax) or at the income tax scale.

But for a passive investor, the challenge is to spend as little time as possible managing your investment. Ideally, he does not want to have to ask himself questions about the choice of stocks to put in his portfolio. But building a diversified stock portfolio takes time and involves placing multiple orders in the stock market. There is an alternative to direct equity investment: investing in equity mutual funds.

Investing in equity funds.

The question then arises as to which means to turn to. Passive investors turn massively to index funds such as trackers and ETFs that replicate the performance of the Nasdaq or CAC 40. They prefer funds with strong geographic and sector diversification. We can particularly mention MSCI World among the benchmark indices for investing in the stock market. Amundi and the US giant BlackRock (with its iShares range) are two management companies that offer a wide range of ETFs. Index funds have very low annual management fees (generally around 0.20% or 10 times less than active funds), optimizing results net of investment fees.

Once the saver has chosen his tax bracket (PEA or life insurance) and his investment medium (index fund as suggested above or other), he asks himself one last question: When is the right time to invest? To correctly capture the performance of the stock market over the long term, a popular strategy right across the Atlantic is DCA (Dollar Cost Averaging). It consists of investing a fixed amount at regular intervals, without trying to predict the short-term development of the stock markets. The best organized passive investors set up an automatic payment program, for example by allocating 300 euros every month within a life insurance contract.

To note

For readers of Echo’s START, our partner Avenue des Investors, an information and financial education portal created in 2018 by two passionate investors, shares its knowledge of personal finance.

Note bis

This forum was written by a non-editorial contributor. Les Echos START does not pay him, nor did he pay to publish this text. The choice to publish it was therefore made solely on the basis of editorial criteria.

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