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Stock Market Index Information
How Wall Street Keeps Score
Wall Street has several ways for investors to keep track of the market. The easiest ways to find out how the market is performing each day is to look at a newspaper, the television, or the Internet. Typically, people look at the Dow Jones Industrial Average, the NASDAQ, or the S&P 500. These indexes are calculated averages of closing prices for the stocks they represent. By watching them, you can get a general idea of how the market is doing. It also gives you clues to the trend of the market, whether it is going up or down or sideways.
History of the Dow Jones Industrial Average
In 1882, three men, Charles Dow, Edward Jones and Charles Bergstresser started Dow, Jones and Company. It published a daily, hand written news bulletin which messengers delivered to subscribers. The bulletins were called "flimsies."
In 1884, Charles Dow wanted to measure how the stock market did each day. He took 11 stocks (9 railroad and 2 industrial) and calculated the average of the closing prices. This average was published in the bulletin. In 1896, it became the Dow Jones Industrial Average. By 1928, the Dow increased to 30 stocks, which is what it remains at today. Sometimes the Dow is referred to as the Dow 30. These 30 stocks are a cross section of the most important sectors in the market. Today some of these stocks have nothing to do with industry, but the historical name sticks.
Over time, the Dow changed from an equal-weighted index to one in which different stocks weigh differently. Essentially, stocks with a higher weighting affect the Dow index more than stocks with a lower weighting. For example, American Express is weighted high in today’s market, so if this stock is having a bad day and falls by several points, it is possible that the Dow could be down for the day. But keep in mind, the Dow is just an average of the 30 stocks. It’s possible that the market could be down for the day, but the stock you own is up, or the other way around.
The NASDAQ ( National Association of Securities Dealers Automated Quotations) tracks more than 5000 stocks. It’s only second to the Dow, so whenever you’re watching television or looking at the Internet, when you see the Dow listed, you will almost always see the NASDAQ below it.
Another index that many people watch closely is the S&P 500. If you guess that this contains 500 stocks, your right. The Standard & Poor’s Corporations (S&P) has selected 500 companies to represent on the stock market. They consist of industrials, utilities, financial companies, and transportation.
The Point System
To measure how much you will make or lose in the stock market, Wall Street uses a point system to represent dollars. For example, if your stock went from $15 a share to $20 a share, you would say your stock went up 5 points.
The major indexes like the Dow, NASDAQ, and the S&P 500 use the same type of scoring. If the Dow went from 12,000 to 12,100, you would say the market went up by 100 points. If your stock went from $15 a share to $16 a share, you made a point, not a dollar.
Let’s say you decide to buy 1000 shares of a stock that costs $10 a share. It will cost you $10,000. If the stock goes to $11, you made 1 point. If the stock goes to $12, you made 2 points. Here’s the important part: If you have 1000 shares of stock and you made 1 point, you make a $1000 profit. If the stock goes up 2 points, you make $2000 profit. So it goes, the more shares you own, the more money you make, or lose.
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