So how do stock investors choose stocks?
Let’s start with the basics with WIN Investing.
A stock is a partial share of ownership in a company. Moreover, a unit of stock is called “shares,” which are traded on stock exchanges, like the New York Stock Exchange (NYSE) or Nasdaq.
“A stock is a partial share of ownership in a company”
WEALTH TRAINING COMPANY
Stock investors know that the price of a stock is determined by supply and demand, or the number of buyers versus sellers
So, when there are more buyers than sellers, the price increases. Alternatively, if there are more sellers than buyers, the price goes down.
Stock investors know that a company’s stock price is a reflection of how much investors think a company (or a portion of a company) is worth
Stock investors invest in a company’s vision and faith that the company will eventually become profitable. That’s why a company doesn’t need to make a profit to be valued by the market. It is about prospects.
Stock investors know that because of the speculative nature of stocks, prices can fluctuate quickly and drastically, depending on public perceptions.
“Stock investors invest in a company’s vision and faith that the company will eventually become profitable”
WEALTH TRAINING COMPANY
So how do stock investors choose which stocks to purchase?
There are two main styles of investing; active and passive. Active investors try to beat the market by purchasing shares they believe are undervalued, with the intent to sell once the 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 US, there’s a fairly even number of passive versus active investors.
“many stock investors actively manage their stocks to assess a company’s potential value, and ultimately find undervalued stocks” – Wealth Training Company
For example, 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.
But due to the high risks involved many stock investors actively manage their stocks to assess a company’s potential value, and ultimately find undervalued stocks.
Active stock investors do this by investigating a company’s business operations, review its financial statements, and price trends, to find undervalued companies
An active stock 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.
So, stock investors need to find their comfort zone, and where they fall in the investment continuum, which depends on their risk tolerance and long-term goals.