Archive for April, 2012

How the Stock Market Works

What is stock?
Stock is a piece of ownership of a company. When a company needs to acquire extra money to help grow the business, they can sell some or all of the ownership of the company in the form of stocks. So if you were to buy 100% of a company’s stock, you would own the whole company. If you own enough stock you also have some decision-making power within the company. Buying stock is a very popular form of investing.

What is a share?
A share is one individual piece of stock. It represents a very small percentage of ownership of a company.

What is the Dow Jones or the DJIA?
The Dow Jones Industrial Average (often referred to as the “Dow”) is an averaged number representing the values of 30 U.S. “blue-chip” stocks. The DJIA is the most well-known market indicator in the world and was created in 1896 by Dow Jones & Company, which is actually a publicly-traded company (DJ) on the New York Stock Exchange (NYSE). They produce many important business publications including The Wall Street Journal, Barron’s, and several stock indexes.

What is the Nasdaq?
The NASDAQ refers to two different things. First is the largest electronic stock market in the U.S. – the National Association of Securities Dealers Automated Quotation System. Second is the popular stock index called the NASDAQ Composite Index. It measures all domestic and international stocks listed on The NASDAQ, which number over 3,000. It was started in 1971 and is now one of the most important stock indexes.

What is the Big Board?
The Big Board is another name for the New York Stock Exchange.

What is the S&P 500?
The S&P 500 is a stock index published by Standard & Poor’s. It measures 500 U.S. stocks that are supposed to be representative of the overall stock market. It was created in 1957.

What determines a stock’s price?
There are many factors that play into a stock’s price. Overall, though, the price is determined by investors’ perceptions of what the stock is worth.
Some of the biggest factors include:
How big and successful the company is (especially its earnings)
Recent company news
The state of the U.S. and world economies
Whether there is a bull or bear market
World events, whether good or bad
For more information, see our Stock Prices page.

What is a bull market?
A bull market occurs when stock prices are rising faster than their historical averages. It can last months or even years. It is the opposite of a bear market.

What is a bear market?
A bear market occurs when stock prices are falling faster than their historical averages. It can last months or even years. It is the opposite of a bull market.

What is a market crash?
The market has “crashed” when stock prices have dropped dramatically. One of the worst crashes was Black Tuesday, which occurred on October 29, 1929 and led to the Great Depression.

What is insider trading?
Insider trading occurs (1) when an insider to a company, such as an officer or someone who owns a large percentage of the company, trades the company’s stock. This is legal and acceptable, as long as that person is not trading based upon non-public company information.