Investing 101: Choosing Stocks
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Questions and Answers

What is the main difference between active and passive investors?

  • Active investors only invest in large-cap companies, while passive investors invest in small-cap companies.
  • Active investors believe they can beat the market, while passive investors do not. (correct)
  • Active investors have a long-term investment strategy, while passive investors have a short-term strategy.
  • Active investors believe in diversifying their portfolios, while passive investors prefer to focus on a few stocks.

    • What does the phrase 'beating the market' usually refer to?

  • Earning a return on an investment that is less than the S&P 500 index.
  • Earning a return on an investment that exceeds the Standard & Poor 500 index. (correct)
  • Earning a return on an investment that exceeds the Dow Jones index.
  • Earning a return on an investment that is equal to the Nasdaq index.

    • What is the S&P 500 index a measure of?

  • The average performance of small and mid-range stocks in the United States.
  • The average performance of all publicly traded companies in the United States.
  • The average performance of companies in the technology sector.
  • The average performance of 500 of the largest companies in the United States, weighted by company valuation. (correct)

    • What does the phrase 'market value' correspond to?

    <p>The perceived value of a company by its investors.</p> Signup and view all the answers

    What is the analogy used to describe the stock market?

    <p>A voting machine in the short term and a weighing machine in the long term.</p> Signup and view all the answers

    Study Notes

    What are Stocks?

    • Stocks are partial shares of ownership in a company, allowing investors to buy a share in the company's success or failure.
    • A stock's price is determined by the number of buyers and sellers trading it, with the market price representing what buyers and sellers believe the stock is worth.

    Investment Goals

    • Investors aim to make money by purchasing stocks whose value will increase over time.
    • Some investors aim to grow their money at a faster rate than inflation diminishes its value.
    • Others strive to "beat the market," growing their money at a faster rate than the cumulative performance of all companies' stocks.

    Beating the Market

    • The phrase "beating the market" 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.
    • The S&P 500 is a proxy for the overall market, but does not directly represent the market as a whole, with small and mid-range stocks fluctuating according to different patterns.

    Market Behavior

    • The stock market behaves like a voting machine in the short term, with short-term fluctuations in stock prices reflecting public opinion.
    • In the long term, the stock market behaves like a weighing machine, with stock prices reflecting the company's true value.

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    Learn how investors decide which stocks to buy, understanding the basics of stocks and investment goals.

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