Stock Market Basics: How Do Investors Choose Stocks?

How Do Investors Choose Stocks?

You’ve likely heard about the recent drama involving GameStop, but unless you’re familiar with how the stock market works, the intricacies of what’s going on may have been lost on you.

Video Length: 00:05:00

And if that’s the case, we don’t blame you—the world of investing can feel like an intimidating place, especially if you’re relatively new to the scene. So for those looking to learn the basics of stock trading, this video by TED-Ed is a good place to start.

We touch on some key takeaways from the video below, like why stock prices fluctuate, how investors choose which stocks to purchase, and differences between active and passive investing.

Stocks, and Why Prices Fluctuate

If you’re still reading this, we’re going to assume you’re fairly unfamiliar with the world of stocks. So let’s start with the basics—what even is a stock?

A stock is a partial share of ownership in a company. Units of stock are called “shares,” and these are mostly traded on stock exchanges, like the New York Stock Exchange (NYSE) or Nasdaq.

The price of a stock is determined by supply and demand, or the number of buyers versus sellers. When there are more buyers than sellers, the price increases. On the flipside, if there are more sellers than buyers, the price goes down.

Essentially, a company’s stock price is a reflection of how much investors think a company (or a portion of a company) is worth. That’s why a company doesn’t actually need to make profit to be valued by the market—investors simply need to have faith that it’ll become profitable eventually.

Because of the speculative nature of stocks, prices can fluctuate quickly and drastically, depending on public perceptions.

Passive Investors vs. Active Investors

So how do investors choose which stocks to purchase? Well, there are two main styles of investing—active and passive:

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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