What does it mean when you hear that the Dow was close to setting a record? What about if the market is down - should you start panicking? What does the market mean to your investments?
If you watch the news and listen to the radio, it could be easy to believe that the Dow Jones rules the stock market. After all, the news seems to make its ups and downs front page news. The other stock indexes are often included somewhere down the list, if they are mentioned at all.
What do these indexes tell us? How should we use the information in managing our portfolios?
First, you have to realize that the number isn't the important part. What is important is the percent of change. The movement up and down tells you how the index is performing. The index simply reflects the market it represents and the direction it was going for the day. Over time, you can see the larger ups and downs of the market represented.
Most stock indexes only reflect a portion of the actual market.
For example, the Dow Jones Industrial Average is the oldest and most popular index. It contains only 30 stocks. Each stock represents one of the most influential companies in the US and has an annual revenue of over $7 billion. It only represents about 1/4 of the value of the total market, and doesn't represent any small or mid-size companies.
The Dow is price weighted - the only major index that is. This means that if a stock price changes by $1, it has the same effect on the index no matter the percent change for the stock. If a $30 stock has a $1 change it has the same effect as a $70 stock having a $1 change.
Many financial professionals refer to the S&P 500 as representative of the market. It includes 500 of the most widely traded stocks. It is mostly comprised of the larger companies. It covers approximately 70% of the market's total value.
The S&P is a market cap weighted index, which gives more importance to the larger companies. A change in a big-time blue chip stock will have a greater impact on the index than a smaller company's stock. In general, the S&P represents the market much better than the Dow.
An even broader index is seen in the Nasdaq Stock Market Composite. It represents ever stock on the Nasdaq market - over 5,000 stocks. Although it appears broad, the Nasdaq leans towards the tech stocks because it is a market cap weighted index.
There are many other indexes that measure smaller sections of the overall market. What the indexes are telling you is how investing patters are changing and what the current trends are. You can see snapshots of what is happening in the market index. You may even see a way to compare different sectors and stocks.
Keep in mind that the indexes do not represent the overall market.in order to make wise decisions, you should stay focused on your own stocks and your targets. Even when the indexes are down, you will find stocks that are moving higher. Indexes provide you with a historical perspective. They do not forecast where the market is going. You can use them to see trends over a long period of time.
Martin Lukac http://www.MartinLukac.com , represents http://www.RateEmpire.com , an Internet consumer banking marketplace. RateEmpire.com is a destination site of personal finance, investing, taxes and mortgage rates. RateEmpire.com provides mortgage guides and financial rates and information. RateEmpire.com also operates a financial portal #1 American Financial, found at http://www.1AmericanFinancial.com