Listening to business reports can make the stock market sound equally exciting and intimidating. Here's how to follow along.
POINTS TO KNOW
- The "stock market" incorporates 2 concepts: the exchanges where stocks are traded and the indexes that measure the values of these stocks.
- The most widely known indexes aren't necessarily the most representative of all the stocks in the United States.
What's the stock market?
So when "the market is up," it means that, on average, more stocks had gains than losses, not necessarily that all stocks gained value.
In the same way, if you say "Groceries are getting more expensive," you don't mean that every single item you buy is getting pricier—just that the total amount you spend is going up.
Is there one "market" or many?
The concept of a stock market (also known as an equity market) combines 2 components: the exchanges that host the actual trading of stocks and the indexes that measure the prices of the stocks being traded.
There are multiple exchanges and indexes. Business reports generally use a particular stock market index as a proxy for the entire market.
These are some of the most prominent U.S. stock market indexes you might hear about.
When one major stock market index is up but others are down (or vice versa), you'll often hear something like "The markets were mixed."
Dow Jones Industrial Average
"The Dow" contains only about 30 stocks issued by major U.S. companies, but it's the most widely known and reported index.
The stocks in this index come from a variety of industries. But because the index is so exclusive, its performance isn't necessarily reflective of the rest of the stock market. That said, it's often the headline number you'll hear about.
Standard & Poor's 500 Index
"The S&P" contains the 500 largest stocks traded in the United States, and it also covers multiple industries. These stocks make up about 75% of the capitalization (the total value) of all stocks traded, so it's a decent indicator of the stock market as a whole.
Nasdaq Composite Index
"The Nasdaq" contains all stocks traded on the Nasdaq Stock Market. It's comprised of about 4,000 stocks and is heavily weighted toward the technology and biotech industries.
The indexes above are the most commonly talked about, but there are many other indexes that track specific segments of the market.
"Total" indexes are the broadest. For example, a total U.S. stock index would track every stock traded in the United States, and a total global stock index would track every stock traded in the world's stock markets.
There are indexes that follow specific international stock markets.
For example, "the Nikkei" (Japan's Nikkei 225 Stock Average) is often cited when talking about Japan's Tokyo Stock Exchange. "The FTSE" (Financial Times Stock Exchange 100 Index) is most commonly referenced when covering the U.K.'s London Stock Exchange.
There are also indexes that generally track specific countries (like Germany or Japan) or regions (like Europe or Asia-Pacific).
Finally, sector-specific indexes track only stocks in certain industries, like energy, health care, or technology.
Why are stocks so volatile?
The way the media talk about the market as a single massive entity, you'd think every stock in the U.S. behaves exactly the same way every day. If that were the case, there'd be no reason to own more than one stock.
These factors boil down to one question: If what investors believe about the future comes to pass, is that going to be good or bad for the companies issuing the stocks?
For example, tax cuts can buoy the stock market because Americans should have more money to spend and put back into the economy. But high unemployment can do the opposite.
In cases like these, most stocks tend to rise and fall in tandem—depending on how much a specific industry is expected to gain or suffer.
Of course, there are also many reasons a specific stock can gain or lose value. If the company's doing better than expected, new management takes over, or a product recall is announced, these events will all impact the company's stock price.
Taken together, these large and small factors account for the constant movement of overall stock markets.
Usually refers to common stock, which is an investment that represents part ownership in a corporation. Each share of stock is a proportional stake in the corporation's assets and profits.
A marketplace in which investments are traded. The exchange ensures fair and orderly trading and publishes price information for securities trading on that exchange.
An unmanaged group of securities whose overall performance is used as a benchmark. An index may be broad or focus on one sector or type of security.