When you hear a news anchor on TV talking about stock market new developments, they usually include terms such as the Dow Jones, or the NASDAQ, or the FTSE in their report. What do these phrases and abbreviations mean?
These terms refer to stock markets or stock exchanges where a company is listed. A company must be listed on a stock exchange for its shares to be traded publicly. After a company’s shares are released to the public in an Initial Public Offering (IPO), they are then available for the general public to be traded at the stock market. New York Stock Exchange is probably the biggest stock market in the US, while the FTSE holds that honor for Europe.
When people ask: “how is the stock market doing? What are the latest developments?” they mean to ask how the stock market index is performing. Stock market indexes are the key indicators to the performance of any stock market.
A stock market index, at its simplest, is the cumulative stock prices of the companies trading divided by the number of stocks traded to achieve an average indicator of stock market performance.
Examples of popular US stock markets indexes are the Dow Jones Industrial Average, the NASDAQ composite and the S&P 500.
The Dow Jones lists the stocks of 30 companies, ranging from food giant McDonalds to bankers like Citigroup to entertainment firms like Disney.
The Nasdaq composite tracks 5000 companies from different sectors, but its mainly focused on the technology stocks.
The S&P 500 measures the stock of 500 of the largest public companies. They are categorized as the largest according to their market value. The S&P 500 is actually considered a pretty solid indicator of overall stock market performance since they cover companies from a broad base of sectors.
Indexes form the basis of the stock market. New investors are often advised to invest in these “blue-chip” stocks that are traded on either of the above three stock exchanges because they offer great stability and the chance of a regular dividend income over time.
Some of the most popular international stock market indexes include the FTSE (Britain), the Nikkei (Japan), the Hang Sang (Honk Kong), the DAX (German) and the CAC (France).
Because stock market indexes give a great snapshot of the stock market, they are used as indicators to gauge stock market performance. Beginner investors that not only invest in individual stock, they can also invest in mutual funds, which are representative stocks of a certain stock market index. Mutual funds are marginally safer investments because they group together stocks that perform roughly the same way, and are professionally managed.
You now have a better understanding of the stock market, new insight into the workings of stock market indexes and an informed take on issues facing beginner investors. This knowledge will help you make sense of the financial terminology heard everyday on TV and read in newspapers so you too can become a savvy investor.