Archive for April, 2010

Basics of the Stock Market

Monday, April 26th, 2010

Stocks are traded either on an exchange (a physical location) or over the counter (OTC) between brokers via computers. Shares of smaller companies, many bonds, and also mutual funds are typically traded OTC. Normally the shares of larger companies are traded on stock exchanges. The largest and most well known stock exchange is the New York Stock Exchange. It is located at 11 Wall Street in the financial district of lower downtown Manhattan of New York City. Many countries throughout the world also have their own stock exchanges. Stocks and bonds are bought and sold through brokers who receive a commission on each securities transaction. The stock and bond markets are heavily regulated. In the U.S. the primary securities regulator is the U.S. Securities & Exchange Commission.

Another important topic for an understanding of the stock market is learning about the Dow. You may have heard the phrase “How did the market do today?” The “market” in this context is usually in reference to the Dow Jones Industrial Average and is well known just as “The “Dow. So what is the Dow? it is an index (group of stocks) reflecting the value of the 30 largest public companies in the U.S., such as IBM, Exxon Mobil, etc. The Dow was formed by Charles Dow and Edward Jones many years ago. It acts like a barometer of the state of the economy. The Dow are affected by investors’ psychological factors, economic and political events, wars, and disasters.

There are other indexes other than the Dow. Examples are the Standard & Poors (“S&P 500), Russell 2000, NYSE Composite, etc. Why are there so many? The indexes are groups of stocks that act as performance benchmarks for money managers, such as those who manage mutual funds. Mutual funds can have portfolios of large company stocks, small company stocks or a mix. If a mutual fund’s investment objective is to invest in smaller sized companies, the fund manager would not use the Dow as a benchmark but another index, since the Dow is an index of large company stocks.