Finally, after deciding who will manage your investment, whether you will try to time the market, and the various asset classes you wish to hold, you must decide which specific securities to buy within each class. This is termed security selection.
For example, you might decide that you want 30 percent of your money in small stocks. This is an asset allocation decision. Next, however, you must decide which small stocks to buy. Here again there is an active strategy and a passive strategy. With an active strategy, we try to identify those small stocks that we think will do the best in the future; in other words, we try to pick “winners.” Investigating particular securities within a broad class in an attempt to identify superior performers is often called security analysis.
With a passive security selection strategy, we might just acquire a diverse group of small stocks, perhaps by buying a mutual fund that holds shares in hundreds of small companies.