Active trading

Investing is very different today than how you see it portrayed in movies and television. While Wall Street traders and massive hedge funds are still riding the waves of the stock market every day, online brokerages that let you invest from the comfort of your own home have broken down the barriers and brought the markets to your doorstep.

While this new level of accessibility has given passive investors cheap and easy access to buy-and-hold investing, it has also brought many of the tools of the day traders and hedge funds as well.

Active trading can be seen as the more “hands-on” approach to investing where, instead of passively investing in the long-term positive average returns of the market, you’re trying to beat the average returns by buying and selling based on short-term spikes and dips in price.

Active trading means using earnings, news, economic events and other factors such as technical analysis to try to anticipate the short-term price movements of stocks, so that you can buy stocks whose price is set to rise and sell before their price can drop. 

While that may sound simple, it’s easier said than done. There are a lot of different active trading strategies–none of which are ever a sure thing. It’s up to each investor to figure out which strategies and data points work best for them.

Keep in mind that, due to the large numbers of trades involved in active trading, you should be particularly aware of value-for-money when making multiple trades, particularly if your strategy includes derivatives such as options that incur additional costs each trade. To help you manage these costs, Questrade offers multiple active trader pricing options designed specifically to help cut down on the cost of active trading.

When it comes to any type of investing, there are several different types of risks. Due to the frequency at which active investors trade, and the short time before the securities are sold, the impact of these risks can be magnified with active trading. As with any type of investing, we recommend learning about the risks, as well as learning about risk mitigation strategies and tools such as stop-loss orders, bracket orders, or multi-leg strategies, that can help reduce your risk exposure.

Finally, if you make a very high number of annual trades, the CRA may characterize your investing gains as business income. This means that it could be taxed as full-rate income (100% inclusion) instead of the reduced capital gains tax rate (at either half (50%) or two-thirds (66.67%)), and considered taxable even if your trading is done in a tax-advantaged account like a TFSA or FHSA. To learn more about how high-frequency trading may be taxed, contact your tax advisor.

Note: The information in this blog is for educational purposes only and should not be used or construed as financial or investment advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied, is made by Questrade, Inc., its affiliates or any other person to its accuracy.