How do investors choose stocks? - Richard Coffin
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Active and passive investors have long debated which approach offers the best return for individual investors. A key tenet of the passive philosophy is the Efficient Market Hypothesis, which argues that the trading activity of investors should bring the market price of a stock close to its actual worth.
Behavioural finance contests a key assumption of EMH; investor rationality. Investors are believed to exhibit biases and follow flawed heuristics that challenge their ability to rationally manage their investments. Click here to learn more about behavioural finance and the factors that influence investor decisions.
While active investing is currently the more popular approach, passive investing has rapidly gained popularity over the last decade given its lower fees. Watch this video for a summary of the pros and cons of each approach.
Even within the active philosophy, there are varying schools of thought as to how investors should research and identify attractive stocks. The Fundamental school of thought looks to understand the underlying business of a stock with a consideration for qualitative factors (i.e. product quality, competence of management team, etc.). The Technical school of thought focuses only on the price of a stock, believe stock prices follow trends that can be identified and exploited. Finally, the Quantitative school of thought uses statistics to analyze large amount of data and build models that can be used to identify attractive stocks.
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