2) What does a Roman emperor have to do with the tech market?
3) What is a stock index, and what are the big ones?
So you keep hearing people talk about "the market." Did it go up? Did it go down? But first, let's ask: What is it in the first place?
Simply put, the market is a place to buy and sell stock, bonds, mutual funds, or a number of other financially based "securities." Without a market, there would be no way for the average Joe to buy or sell shares of stock, so what would be the point?
The stock market provides a place where stocks can be bought and sold, so money from investors can get to companies that need it to grow their business.
OK, now to look at why there's a stock market, let's take a trip to Rome, and whoa — you're the emperor! Very nice. You have a beautiful toga and a really great place to hang out and eat grapes.
So you step onto your porch one day to look out at the market, and you see these merchants buying and selling things.
Great, but you want to know how things are going. Are things getting better? Worse? Are there more buyers than sellers? What's the deal?
To find out, you'd hire someone to go around and ask each merchant, "How are you doing?" And after he'd asked enough merchants, you'd have a sense of where things stood.
The same thing applies to the stock market's major indices: the Dow Jones Industrial Average, the S&P 500 Index, and the NASDAQComposite. In 1896, the editors of The Wall Street Journal took the 12 companies they felt best represented the United States economy and put them together in an index.
By 1928, the number of Dow stocks was at 30, and though the companies within the Dow have changed dramatically, the number has stayed at 30 ever since.
The editors essentially said, "We're going to do something very simple here — we're going to add up the price of each of their shares and we'll come up with a price for the index."
Their thinking was that, when the index goes up or down, those paying attention would get an idea of how the economy overall was doing — kind of like your helper asking the merchants at the Roman market how sales are going.
Years later, someone with more of a WeSeed way of thinking figured out that prices matter. But even more important than price is value.
In 1957, the folks at Standard and Poor's created something called the S&P 500 Index. They felt that 30 companies was too small of a sample, so they decided to take the 500 biggest companies in the United States, from a variety of industries.
They took the amount of shares from these companies and multiplied this number by their share price. In other words, stocks with higher market capitalization (share price times the number of available shares) are given a greater weight than "smaller" stocks.
By taking the value of each of those companies and adding it all up, they came up with something called the S&P 500 Index, and it tells you what the collective value of those 500 companies did on a given day.
Years later, people started to come up with different indices that represent different groups of companies — like the NASDAQ, which contains mostly technology and biotechnology names.
What do these three indices tell us? Well, instead of someone asking all of the merchants how their business is doing, all we have to do is check the S&P 500, the Dow, and the NASDAQto get an idea of how "the market" — and therefore investors — are feeling.
That's much simpler now, isn't it?
Three Facts to Wow Your Friends at a Party
1) The “stock market” began on May 17, 1792, when 24 stockbrokers and merchants signed the Buttonwood Agreement. That formed what would become the NYSE.
2) Despite the New York Stock Exchange’s fame, it was not the first stock exchange in the United States. That distinction belongs to the Philadelphia Stock Exchange, which was founded in 1790.
It's not easy to come up with analogies for the stock market, but here's one that might help you understand why "the market" is so important.
Let's pretend that every time you bought something, you had to keep it for the rest of your life. So if you bought a cell phone 10 years ago, you would have to keep it forever.
Remember the brick-sized cell phones from back in the day? Would you want to lug one of those things around now?
Of course not, but too bad. In this bizarro world, you'd have to hang on to it — you couldn't sell it to an antique shop, recycle it at Best Buy, or throw it away.
Can you imagine how much clutter you would accumulate? It would get so bad that you would probably stop buying things altogether. You wouldn't have any place to put them, and you wouldn't want to deal with the hassle of never getting rid of them.
Your electronics would be obsolete, and you don't even want to think about your wardrobe.
That's what it would be like if "the market" didn't exist.
Without a place for stocks to get transferred from one person to another, the economy would slow to a crawl and few people would bother to come up with great ideas anymore.
Stocks, bonds, and mutual funds would cease to be a viable alternative to piggy banks, as all of that analysis and mental energy would just be too much work for very little payoff.
The market allows investors to buy shares, knowing full well they can sell them again if they change their mind — someone will almost always be on the other end wanting to buy them back.
And now that the online world has made investing easier, people are more likely to buy and sell stocks as a way of building their nest eggs.
So you can gladly buy a new cell phone because you don't have to keep it around forever. And you can even carry it around in your pocket rather than using a wheelbarrow. You also don't need to hang on to the shares of that cell-phone company you don't love so much anymore.
Aren't you glad the market is around?
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