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  • Every day, billions of stocks are traded on the New York Stock Exchange alone.

  • But with over 43,000 companies listed on stock exchanges around the world,

  • how do investors decide which stocks to buy?

  • To answer this question, it's important to first understand what stocks are,

  • and what individuals and institutions hope to achieve by investing in them.

  • Stocks are partial shares of ownership in a company.

  • So by buying a stock, investors buy a share in the company's success

  • or failureas measured by the company's profits.

  • A stock's price is determined by the number

  • of buyers and sellers trading it;

  • if there are more buyers than sellers, the price will increase, and vice versa.

  • The market price of a share therefore represents

  • what buyers and sellers believe the stock, and by association the company,

  • is worth.

  • So the price can change dramatically

  • based on whether investors think the company has a high potential

  • for increasing profitabilityeven if it isn't profitable yet.

  • Investors aim to make money by purchasing stocks

  • whose value will increase over time.

  • Some investors aim simply to grow their money at a faster rate

  • than inflation diminishes its value.

  • Others have a goal ofbeating the market,”

  • which means growing their money at a faster rate

  • than the cumulative performance of all companies' stocks.

  • This idea ofbeating the marketis a source of debate among investors

  • in fact, investors break into two main groups over it.

  • Active investors believe it is possible to beat the market

  • by strategically selecting specific stocks and timing their trades,

  • while passive investors believe it isn't usually possible to beat the market,

  • and don't subscribe to stock picking.

  • The phrasebeating the marketusually refers to earning a return

  • on an investment that exceeds the Standard & Poor 500 index.

  • The S&P 500 is a measure of the average performance

  • of 500 of the largest companies in the United States,

  • weighted by company valuation,

  • meaning that companies with a higher market value

  • have a larger effect on the S&P—

  • again, market value corresponds to what investors

  • believe a company is worth rather than actual profits.

  • The S&P doesn't directly represent the market as a whole

  • many small and mid-range stocks can fluctuate according to different patterns.

  • Still, it's a pretty good proxy for the overall market.

  • It's often said that

  • the stock market behaves like a voting machine in the short term,

  • and a weighing machine in the long term”—

  • meaning short term fluctuations in stock prices reflect public opinion,

  • but over the longer term, they do tend to actually reflect companies' profits.

  • Active investors aim to exploit the short term,

  • voting machineaspect of the market.

  • They believe the market contains inefficiencies:

  • that stock prices at any given point in time may overvalue some companies,

  • undervalue others, or fail to reflect developments that will impact the market.

  • Active investors hope to exploit these inefficiencies by buying stocks

  • they think are priced low.

  • To identify undervalued stocks,

  • they may investigate a company's business operations,

  • analyze its financial statements, observe price trends, or use algorithms.

  • Passive investors, by contrast,

  • put their faith in the long termweighing machineaspect of the market.

  • They believe that even though markets may exhibit inefficiencies at any given point,

  • over time those inefficiencies balance out

  • so if they buy a selection of stocks that represents a cross-section of the market,

  • over time it will grow.

  • This is usually accomplished through index funds,

  • collections of stocks that represent the broader market.

  • The S&P 500 index is one of many indexes.

  • The overall goal is the same for all index funds:

  • to hold stocks for the long term and ignore short-term market fluctuations.

  • Ultimately, active and passive investing aren't mutually exclusive

  • many investment strategies have elements of each,

  • for example, choosing stocks actively but holding them for the long term

  • as passive investing advises.

  • Investing is far from an exact science:

  • if there was one foolproof method, everyone would be doing it.

Every day, billions of stocks are traded on the New York Stock Exchange alone.

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B1 market stock term company passive index

How do investors beat the stock market? - Richard Coffin

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    林宜悉 posted on 2020/11/10
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