Stock Market Basics: How Do Investors Choose Stocks?

  • Active investors try to beat the market by purchasing shares they believe are undervalued, with the intent to sell once price goes up
  • Passive investors track the market, and tend to hold onto their stocks with the belief that over time, their value will increase

In the U.S., there’s a fairly even number of passive versus active investors—in 2019, about 45% of assets in U.S. stock funds were managed passively.

And while active investors have the potential to make a lot more money, passive investments have generally shown higher returns in the last decade.

Active Investors: Picking a Stock

Despite the risk involved (or perhaps because of it) many investors choose to actively manage their stocks. To assess a company’s potential value, and ultimately find undervalued stocks, an active investor may:

  • Investigate a company’s business operations
  • Review its financial statements
  • Track price trends, with the goal of finding a company that’s undervalued

An active investor may also choose to put money in one or more actively-managed funds, or simply hire a financial planner to do the work on their behalf.

Finding your Comfort Zone

Since there are pros and cons to both styles of investing, how you decide to invest, and where you fall on the investment continuum, ultimately depends on your expectations, risk tolerance, and long-term goals.

It’s also worth noting that these investment styles aren’t mutually exclusive—a combination of both can be used in order to cover all your bases.

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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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