Things You Should Know: The Stock Market & Market Indexes
Let's talk about the stock market. What is it?
The stock market is actually comprised of many markets where people buy and sell stocks. A company stock refers to ownership. For example, you can own Disney stock. How much you own is divided into "shares" of stock. For instance, you could say "She owns 10 shares of Disney stock."
Actual stock markets are both virtual and physical in nature. You've probably heard of the New York Stock Exchange (NYSE). People there on the floor are buying and selling every weekday. It's quite a sight to behold: chaotic and fast-paced.
Then there's people at home buying and selling from their laptops. For example, if I want to buy or sell, I'll log onto the financial institution where I've opened my investment accounts and place my trades. This is a virtual way to participate in the stock market.
Here are a couple pictures from when I visited the floor of the NYSE in 2014. It was a nerd's dream.
Everyday you'll hear how the stock market was up or down. This is a general statement referring to all stocks, but specifically to market indexes. Indexes are the grouping of stocks which are then averaged out to give folks a better idea of the overall performance of the market.
The most famous indexes are the Dow Jones Industrial Average, the Nasdaq Composite, and the S&P 500. There are several others, but these three are the most famous and referenced.
The DJIA is the price-weighted average of 30 significant stocks. Companies like General Electric, Johnson & Johnson, Home Depot are part of the Dow. Your company has to be really big and important to society and the economy to be included in this index.
The Nasdaq Composite is another important index. The Nasdaq is comprised of 3,000 common equities (so this includes common stocks, but also real estate investment trusts, American depositary receipts, and tracking stocks). Companies included in the Nasdaq Composite don't need to be headquartered in the US either. The Nasdaq is market capitalization-weighted. I'm sure these last few sentences mean absolutely nothing to you and I apologize for that.
Then there's the S&P 500. This is an index that stands for Standard & Poor's 500. It's made up of 505 large companies. This index is seen as an important and accurate measurement of how these large companies are performing overall.
Here are few more pictures from the NYSE, including Jim Cramer yelling into a camera.
Okay, let's recap what we've learned:
The stock market refers to the exchange (buying and selling) of company stocks.
The stock market performance is viewed through indexes. The most popular are the Dow Jones, Nasdaq, and S&P 500.
We could really do a deep dive into how the stock market works, but I'm sure I've bored you enough for now. Just remember if Johnny Appleseed were a financial planner he would've said, "a little financial literacy a day keeps bankruptcy and financial ruin away."
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