We've discussed what a stock is. Now we want to talk about the stock market. What is the stock market? The stock market is where stocks are bought and sold. Think of the stock market as the super market for stocks. The bond market is the super market for bonds, the currency market is the super market for currencies, the commodities market is the super market for commodities, you get the point I hope.
In order to gain access to the stock market you need a stock broker, a Goldman Sachs, Morgan Stanley, E-Trade, Ameritrade, or any one of the dozens of brokers available. Once you have a broker, accessing the market is as simple as calling your broker and telling your broker what to buy or sell, or logging into your online account and placing a buy or sell order.
What Does "The Market is Up or The Market is Down" Mean?
There are thousands of stocks in the stock market and an easy way to get an understanding as to what the stock market is doing as a whole is to create an index. An index is a way to measure the movement and value of the stock market by using a select group of stocks. The three major indices in the United States are the Dow Jones Industrial Average, the S&P 500, and the NASDAQ Composite.
The Dow Jones Industrial Average is usually referred to as the Dow, and is comprised of 30 stocks, big companies, companies that most everyone has heard of before, like Coca-Cola, Apple, IBM, Home Depot, McDonalds, and Disney to name a few. 30 stocks of different industries are tracked using a weighted average, this gives investors a reading of what the market is doing. On September 5, 2017 the Dow was down 234.25. Below are the quotes from the Dow on September 5, 2017. There are a lot of red arrows, which indicate the stock was down for the day. In the case of Apple, AAPL it ended the day down $1.97 per share. When all of these price increases and decreases are averaged we are left with the Dow being down 234.25 for the day.
(Charts by CNBC.Com)
The S&P500 works in a similar way, but it monitors 500 stocks. The S&P 500 is a very important index to investors, professional and amatuer. Many investors use the S&P as a benchmark, meaning you want the return on your investment(s) to be equal to or better than the S&P. Brokers, investors, and hedge funds who have returns higher than the S&P 500 are said to be beating the market. As of September 1, 2017, the S&P 500 has increased by over 9% since January 3, 2017. If you've seen 9% or better on your investments this year you are beating the market, if not, you need to evaluate your investment situation.
The NASDAQ Composite is made of 107 stocks and works in a similar fashion. There are other indices that track specific sectors of the market like transportation, retail, banking, and technology. If you can think of it, there is probably an index out there that tracks it.
Usually when the market has a bad day like it did on September 5, 2017 it takes the rest of the market with it. So you could be invested in a stock that is not a part of the Dow or the S&P 500, and your stock is down because the Dow and S&P are down, this is pretty common. And it works that way when the Dow or the S&P 500 is up big for the day. You've heard the saying a rising tide lifts all boats, the saying applies to the stock market.
That is the stock market. So when someone asks "what is the market doing?" You now know that the market is the Dow or S&P 500, and that based on how those stocks trade on that particular day, the Dow or S&P can be up, down, or unchanged.
What Causes Stocks to Increase and Decrease in Value?
The prices of stocks are driven by supply and demand. Great demand and little supply for a stock causes the stock price to rise. High supply with no demand causes the stock price to decrease. Supply and Demand are created by many different factors, such as news events, company events, earnings, product releases, and many other factors. Good news about a company and a company's growth prospects will see demand for the company's stock increase, and as investors buy the stock to be a part of the company's future growth the stock price will increase.
In Summary
The stock market is the market place where stocks are bought and sold. The market indices are used to track the overall market. Stock prices are determined by supply and demand, when there is more demand than supply the stock price goes up. When there is more supply than demand the stock price goes down.
I hope this helps you better understand what the stock market is. Keep an eye out for more articles in our Beginners Block. Get notified of new articles by leaving your email.