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What Exactly is the Stock Market??

Have you ever been curious about what people really mean when they talk about the stock market? Me too, so basically it is just a market of exchange where one can buy a part ownership in a company. People sell and buy shares of stock, which gives you a percentage of that company depending on how much stock you own.

What are the major indexes in the US stock market, and what do they represent?

First off, indexes are the platforms of the stock market. Each one represents a different category that companies fall into. Numbers are computed to explain how these collections of stocks are performing, which hints at how the economy is doing. The three biggest indexes are…

  1. The Dow Jones Industrial Average
    • Know as the Dow Jones or Dow 30, this is one of the oldest, most frequently used, and well known indexes in the U.S. market. It makes up one fourth of the entire value of the U.S. stock market. It is comprised of 30 of the largest publicly owned companies. It covers all categories of indexes except for transportation and utility companies. A few examples of the companies that are in this index are Apple, McDonalds, Nike, and Microsoft.
  2. The Standard & Poor’s 500
    • Referred to as the S&P 500, this index is made up of 500 of the most extensively traded stocks in the United States. It represents 80 percent of the value of the U.S. stock market. (You may be thinking how is that possible if the Dow Jones makes up a fourth of the value of the stock market, but companies may be grouped into several indexes. For example Apple is in four different indexes). Looking at this index gives investors a good idea of how the U.S. economy is moving as a whole.
  3. The NASDAQ Composite
    • Within this index, technology stocks are traded. This index does include some companies that are not based in the United States. It also includes financial, industrial, insurance, and transportation industries. Unlike the Dow Jones and the S&P 500, it includes small and large businesses. The movement of this index represents the general performance of the tech industry.

Why might companies go public?

Going public means that companies open themselves up to the public so that others may own shares in their company. Businesses do this to gain money to grow their company because when one buys a share they are paying that company however much one share costs. When people buy shares they are investing in the company insinuating that the company will grow and shareholders will make money.

What are the macro (large scale) things affecting the market returns in stocks?

More things affect the economy than one might think. Expectations, the population’s disposable income, interest rates, and tax rates are a few of the major aspects that might shift the market.

  1. Expectations
    • The majority of the market is based on expectations whether it’s the businesses’ expectations or the shareholders’ expectations. If consumers believe that the market will go down they panic, and they will out their money by selling their shares. When everyone starts to sell their shares the price lowers because a stock is only worth what someone wants to pay for it. Any shock to the U.S. creates uncertainty and because everyone hates uncertainty this can also cause some pessimism and cause the markets to go down.
  2. Disposable Income
    • When Americans have less income that is readily at their disposal then they do not invest as much, and less investment means not as much money will be infiltrated into the stock market causing the market to go down.
  3. Interest rates
    • When interest rates are raised, it causes investment to go down. When businesses loan money to grow their company they will be charged a higher rate of interest on the money that they borrowed. Because of the decrease in investment, companies will not be expanding as fast which will slow down the market.
  4. Tax rate
    • Taxes play into Americans disposable income as well as expectations. If taxes are to go down, then Americans have more money to invest in the stock market. Also, if people think taxes will go down, then it creates optimism within the markets and vice versa; if taxes are presumed to go up, people will want to take their money out of the market.

What is the correlation between risk/reward i.e. should you even invest your money in the stock market?

To make the most out of your money in the market it is always been said to buy low and sell high. What that means is…the best time to buy shares is when a company’s share price is lower than normal. If you buy let’s say 100 shares of Apple stock and the share price increases by only a dollar you have made 100 dollars. While it may seem that it is just as easy for the share price to go down a dollar, it is in companies best interest to make sure that their stock prices are going up because that means the value of their company is increasing. Also, as a whole, the economy has an upward trend each year as seen through the economy’s Gross Domestic Product (GDP). GDP is best defined as economic growth, so if GDP goes up then the economy is growing. Due to the constant growth, one can be reassured of the fact that eventually the markets will go back up and stock prices should even increase from where they were prior to a potential market crash.

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