We hear it all the time. The market is soaring — a headline investors love — or it’s crashing, one they dread. But what does “the market” really mean?
Financial markets aren’t like physical markets. There is no store where you can go to find what you want at the right price, or even perhaps on sale. Rather, the market is a metaphor for all the stocks that investors can buy and sell — just like “Wall Street” is a metaphor for the people who work in the markets.
There are lots of stocks to buy and sell — almost 16,000 traded on U.S. markets alone, and many, many more on exchanges around the world. That’s too many to track and, thankfully, investors don’t have to.
Instead of tracking individual stocks, investors rely on indexes to do the work. Think of an index as a basket of stocks that tries to represent the entire market or just a piece of it. Indexes are easy proxies for people to follow and contain more than enough stocks to have a feel for what’s happening in the market.
That’s also why when you read about the stock market crashing, you’ll see a reference to the S&P 500, an index made up of 500 large U.S. companies, or the Dow Jones Industrial Average, which has 30 stocks, or even the Nasdaq Composite, a proxy for big tech shares.
Which index investors choose to pay attention to is their choice, depending on their interest. But that choice probably matters less than what all investors really want — to see the market go up.
I’ll tell you more about indexes — how to watch them and how to use them to make investments — in the video.
But first, a pop quiz: The DJIA fell 508 points in the 1987 market crash. How many points would the DJIA lose today if it had a percentage decline equal to that on Black Monday?
Watch this video for the answer and much more.