What does it mean when people say they "beat the market"? How do they know they have done so?

By Investopedia Staff AAA
A:

"Beating the market" is a difficult phrase to analyze. It can be used to refer to two different situations:

1. An investor, portfolio manager, fund or other investment specialist produces a better return than the market average. The market average can be calculated in many ways, but usually a benchmark - such as the S&P 500 or the Dow Jones Industrial Average index - is a good representation of the market average. If your returns exceed the percentage return of the chosen benchmark, you have beaten the market - congrats! (To learn more, read Benchmark Your Returns With Indexes.)

2. A company's earnings, sales or some other valuation metric is superior to that of other companies in its industry. How do you know when this happens? Well, if a company beats the market by a large amount, the financial news sources are usually pretty good at telling you. However, if you want to find out for yourself, you need to break out your calculator and request some information from the companies you want to measure. Many financial magazines do this sort of thing regularly for you - they'll have a section with a title like "Industry Leaders." We don't suggest you depend on magazines for your investment picks, but these publications may be a good place to start when looking for companies to research.

RELATED FAQS

  1. How attractive is the internet sector for a growth investor?

    Learn why the Internet sector is an attractive option for growth investors, as well as what many of them do to reduce the ...
  2. Are there leveraged ETFs that track the banking sector?

    Learn about some of the leveraged exchange-traded funds (ETFs) that investors can use to track the banking industry within ...
  3. When is an expense ratio considered high and when is it considered low?

    Discover what is considered an exceptionally high or low expense ratio for a mutual fund or ETF, and learn why this figure ...
  4. Why is a mutual fund's expense ratio important to investors?

    Understand the nature of mutual fund expense ratios, and learn why it is critically important for investors to be aware of ...
RELATED TERMS
  1. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Smart Beta

    Investment strategies that emphasize the use of alternative weighting ...
  4. Discretionary Investment Management

    A form of investment management in which buy and sell decisions ...
  5. Account Minimum

    The minimum balance required to be maintained in an investment ...
  6. Capital Growth

    The increase in value of an asset or investment over time. It ...

You May Also Like

Related Articles
  1. Bonds & Fixed Income

    How to Diversify with Muni Bond ETFs

  2. Investing Basics

    What are examples of popular companies ...

  3. Fundamental Analysis

    How Investment Risk Is Quantified

  4. Mutual Funds & ETFs

    What companies are positioned to grow ...

  5. Term

    Exchange-Traded Fund (ETF)

Trading Center