Every day, billions of stocks are traded  on the New York Stock Exchange alone. But with over 43,000 companies listed  on stock exchanges around the world, how do investors decide  which stocks to buy? To answer this question, it’s important  to first understand what stocks are, and what individuals and institutions  hope to achieve by investing in them. Stocks are partial shares  of ownership in a company. So by buying a stock, investors buy  a share in the company’s success— or failure— as measured by the company’s profits. A stock’s price is determined  by the number of buyers and sellers trading it; if there are more buyers than sellers,  the price will increase, and vice versa. The market price of a share  therefore represents what buyers and sellers believe the stock, and by association the company, is worth. So the price can change dramatically based on whether investors think  the company has a high potential for increasing profitability—  even if it isn’t profitable yet. Investors aim to make money  by purchasing stocks whose value will increase over time. Some investors aim simply to grow  their money at a faster rate than inflation diminishes its value. Others have a goal  of “beating the market,” which means growing their money  at a faster rate than the cumulative performance  of all companies’ stocks. This idea of “beating the market”  is a source of debate among investors— in fact, investors break  into two main groups over it. Active investors believe it is possible  to beat the market by strategically selecting specific stocks and timing their trades, while passive investors believe it isn’t  usually possible to beat the market, and don’t subscribe to stock picking. The phrase “beating the market”  usually refers to earning a return on an investment that exceeds  the Standard &amp; Poor 500 index. The S&amp;P 500 is a measure  of the average performance of 500 of the largest companies  in the United States, weighted by company valuation, meaning that companies  with a higher market value have a larger effect on the S&amp;P— again, market value corresponds  to what investors believe a company is worth  rather than actual profits. The S&amp;P doesn’t directly represent  the market as a whole— many small and mid-range stocks can  fluctuate according to different patterns. Still, it’s a pretty good proxy  for the overall market. It’s often said that “the stock market behaves  like a voting machine in the short term, and a weighing machine in the long term”— meaning short term fluctuations  in stock prices reflect public opinion, but over the longer term, they do tend  to actually reflect companies’ profits. Active investors aim to exploit  the short term, “voting machine” aspect of the market. They believe the market  contains inefficiencies: that stock prices at any given point  in time may overvalue some companies, undervalue others, or fail to reflect  developments that will impact the market. Active investors hope to exploit  these inefficiencies by buying stocks they think are priced low. To identify undervalued stocks, they may investigate a company’s  business operations, analyze its financial statements,  observe price trends, or use algorithms. Passive investors, by contrast, put their faith in the long term  “weighing machine” aspect of the market. They believe that even though markets may  exhibit inefficiencies at any given point, over time those inefficiencies  balance out— so if they buy a selection of stocks that  represents a cross-section of the market, over time it will grow. This is usually accomplished  through index funds, collections of stocks that represent  the broader market. The S&amp;P 500 index is one of many indexes. The overall goal is the same  for all index funds: to hold stocks for the long term and ignore short-term market fluctuations. Ultimately, active and passive investing  aren’t mutually exclusive— many investment strategies  have elements of each, for example, choosing stocks actively  but holding them for the long term as passive investing advises. Investing is far from an exact science: if there was one foolproof method,  everyone would be doing it.