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

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

17: how do investors decide which stocks to buy?

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

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

31: Stocks are partial shares of ownership in a company.

35: So by buying a stock, investors buy a share in the company's success—

39: or failure— as measured by the company's profits.

43: A stock's price is determined by the number

46: of buyers and sellers trading it;

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

53: The market price of a share therefore represents

56: what buyers and sellers believe the stock, and by association the company,

61: is worth.

63: So the price can change dramatically

65: based on whether investors think the company has a high potential

68: for increasing profitability— even if it isn't profitable yet.

73: Investors aim to make money by purchasing stocks

76: whose value will increase over time.

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

82: than inflation diminishes its value.

85: Others have a goal of “beating the market,”

88: which means growing their money at a faster rate

91: than the cumulative performance of all companies' stocks.

95: This idea of “beating the market” is a source of debate among investors—

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

103: Active investors believe it is possible to beat the market

106: by strategically selecting specific stocks and timing their trades,

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

116: and don't subscribe to stock picking.

119: The phrase “beating the market” usually refers to earning a return

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

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

132: of 500 of the largest companies in the United States,

135: weighted by company valuation,

138: meaning that companies with a higher market value

140: have a larger effect on the S&P—

143: again, market value corresponds to what investors

146: believe a company is worth rather than actual profits.

150: The S&P doesn't directly represent the market as a whole—

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

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

162: It's often said that

163: “the stock market behaves like a voting machine in the short term,

166: and a weighing machine in the long term”—

169: meaning short term fluctuations in stock prices reflect public opinion,

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

181: Active investors aim to exploit the short term,

184: “voting machine” aspect of the market.

187: They believe the market contains inefficiencies:

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

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

200: Active investors hope to exploit these inefficiencies by buying stocks

204: they think are priced low.

206: To identify undervalued stocks,

209: they may investigate a company's business operations,

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

218: Passive investors, by contrast,

221: put their faith in the long term “weighing machine” aspect of the market.

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

229: over time those inefficiencies balance out—

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

237: over time it will grow.

240: This is usually accomplished through index funds,

243: collections of stocks that represent the broader market.

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

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

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

259: Ultimately, active and passive investing aren't mutually exclusive—

264: many investment strategies have elements of each,

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

271: as passive investing advises.

274: Investing is far from an exact science:

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