Investing in the stock market: trading or passive investing?

For many savers, investing in the stock market is considered something complicated, requiring specialized knowledge to earn money, and therefore reserved for professionals or a few enthusiasts ready to devote the necessary time to it.

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

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

Trading: time-consuming and risky

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

This mode of investment is an activity in its own right because trading takes a lot of time. For good reason, the investor must constantly follow the evolution of the financial markets, keep informed of the latest economic news, and adapt the positions of his portfolio in real time. Trading also requires good knowledge of macro and microeconomics.

This method of investment is difficult to envisage for individual investors. This is the reason 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 wishing to take advantage of good stock market performance can implement a much simpler and no less effective strategy for investing in the stock market: passive investing.

passive investing in the stock market

The principle of passive investment is based on holding the shares for a long time, limiting the number of interventions necessary on the part of the investor to manage his portfolio, while favoring investment in trackers (index funds, comes 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. Indeed, on a PEA of more than 5 years or life insurance of more than 8 years, the saver can make withdrawals while benefiting from reduced taxation on capital gains. Only social security contributions are collected on capital gains (taxation reduced to 17.2%). These are capitalizing envelopes, that is to say that a sale with capital gain does not trigger taxation (only withdrawals). Thus, within the PEA and life insurance, the investor can grow his savings, arbitrate between his investments and reinvest his earnings without tax friction. Capital works at full speed.

Conversely, short-term investment (trading), by multiplying transactions within an ordinary securities account (CTO), does not allow any tax advantage. 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 their investment. Ideally, he does not want to have to ask himself questions about the choice of stocks to put in his portfolio. However, building a diversified stock portfolio takes time and involves placing multiple orders on the stock market. There is an alternative to direct equity investment: investing in equity funds.

Investing in equity funds.

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

Once the saver has chosen his tax envelope (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 properly capture the performance of the equity market over the long term, a popular strategy straight from across the Atlantic is the DCA (dollar cost averaging). It consists in investing a fixed amount at regular intervals, without trying to anticipate the short-term evolution of the stock markets. The best organized passive investors set up an automatic payment program, for example by allocating 300 euros each month within a life insurance contract.

To note

For readers of Echos START, our partner Avenue des Investeurs, 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 contributor outside the editorial staff. 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 editorial criteria.

Leave a Comment