Second in a three-part series
Last week I addressed the relationship between market fluctuations in the value of a publicly traded stock and the net income or loss from that company’s operations, along with the methods whereby corporations accumulate capital.
Given the breadth of the topics, part two will expound on “public” trading of stocks (equities).
Definition of a market. Generally speaking, the “market” is very much broader than merely a format for buying and selling stocks. There are myriad “markets”: stock markets, bond markets, commodities markets, stock index markets, futures markets, options markets, financial instruments markets, etc. There is essentially an established market for anything that buyers and sellers desire, from listing one’s home for sale with a broker to the largest corporate endeavors. We are unable to address all types of markets in this article, but some terms might be helpful to know.
Trading exchanges. Millions of transactions are conducted each day, 24 hours per day, seven days per week through “exchanges,” which are “marketplaces.” The two most prominent exchanges in the U.S. are the New York Stock Exchange and NASDAQ. The NYSE is physically located in New York City. NASDAQ does not have a “trading floor”; its transactions are handled electronically. There are also major exchanges throughout the world operating in different time zones. Money never sleeps.
Stock indexes. There are literally thousands of publicly traded entities, including stocks. How does a casual observer or a potential investor know industry trends, stock prices, etc.? The short answer is to observe stock indexes. Stock index companies perform market research and reflect trading activity and prices on a minute-by-minute, even second-by-second basis. They provide a single glance as to overall market trading at a given time. There is no practicable way for an individual observer or investor to have the resources to know “what the market is doing” without beginning with reference to an index.
The three most commonly referenced stock indexes are now familiar household words. They are:
- Dow Jones Industrial Average. “The Dow” is a composite of 30 internationally recognized industrial companies (now, no longer limited to manufacturing). Their stock prices are averaged on a real-time basis, and a glance at the Dow gives an instant summary of what is happening with the stock prices of heavy industries.
- Standard and Poor’s averages, the most common of which is the S&P 500. This index tracks trading activities of the 500 largest market-capitalized companies on the U.S. stock exchanges. S&P also offers tracking of stocks other than those within the 500 aforesaid group. The S&P provides a perspective on a broader range of market activity than the Dow.
- NASDAQ Composite. This exchange, officially the National Association of Securities Dealers Automated Quotations, essentially incorporated former over-the-counter traded stock, plus stocks of start-up companies. It is primarily considered a reference for “high tech” industry stocks.
The three indexes may or may not reflect movement in sequence. For example, heavy industries (Dow) may be down, S&P broader averages may be up, and NASDAQ averages may remain the same, all on the same day. Broadly speaking, myriad factors may affect the performance of any given stock, or “stock sector,” at any point. Examples: Shutting down oil lines will tend to decrease the value of petroleum sector stocks, with no immediate effect on semiconductors; a crop shortage in one part of the world will have an effect on the stock of certain food producers (or their entire sector) without affecting the prices of airlines; a pending war or international event will affect the market value of all stocks.
Who invests in stock markets? Essentially everyone, whether they know it or not: pension funds, college and charitable organizations’ endowments, companies (including banks) with overnight or long-term surplus funds, individual investors for long-term reasons, individual and institutional “day traders” for speculative purposes, insurance companies, all types of businesses, mutual funds, hedge funds, etc. Whether you know it or not, unless you have your money in cash “under a mattress,” your bank deposits and any other funds you have saved in any “liquid” form are reinvested in some type of financial instrument — generally stocks or bonds (debt). Someone somewhere is trying to garner an income on the continuously invested funds.
Next week, the final part of this series will address how to go about investing in the market.
- Allen Wood Jr. is a seasoned Greenwood businessman. Send questions to him at excellententrepreneur1@gmail.com.
