MoneyWatch

Athena financial & insurance services, inc.

Registered Investment Advisors
Text Box: When someone refers to the “stock market” what does that mean to you? Are they talking about the stocks that trade on one of the major exchanges, all the stocks in the United States, or all the stocks in the world? Very often when someone uses the term “stock market” they are referring to one of the major indexes such as the Dow Jones Industrial Average or the Standard and Poor’s 500. You see the numbers every night on the evening news. The Dow Jones Industrial Average may be up 100 points one day, down 30 the next. But what happens when the Dow rises 100 points? Is that a good day? Or just an average one? Measuring the markets can be a daunting task if you don’t know what to look for. The Dow Jones Industrial Average (sometimes known as the Dow 30, the Blue Chips or just the Dow Jones) is only one of several indexes used on Wall Street but is probably the most recognized and most talked about. A journalist named Charles Dow first created the market indicator n the late 1800’s. At that time people on Wall Street found it difficult to interpret the clutter of numbers tossed around on a daily basis. Some companies would be up an eighth of a point or down a half. It was easy to tell how a company was doing if it had a string of down days, but it was much more difficult to figure out how the market was doing as a whole. In an attempt to clear the confusion, Dow started putting out a nightly report in which he combined the daily results of 11 stocks. Railroads were the big traders of the day, but when utility companies started to come along, the number of industries in the report jumped to 20. Today, the Dow holds 30 companies. You probably recognize most of them. They are some of the biggest names in American business—General Motors, Microsoft, Coca Cola, 3M, Disney, IBM and Exxon to name just a few. It is a rare occurrence for these businesses to change. Coca Cola has been listed since 1932 while General Electric has been a part of the Index since 1907. Microsoft is a more recent addition having been added in 1999. The Dow Jones average is unique in that it is price weighted rather than market capitalization weighted. The component weightings are therefore affected only by changes in the stocks' prices, in contrast with other indexes' weightings that are affected by both price changes and changes in the number of shares outstanding. The Standard and Poor’s 500 is often referred to as a broad index because it measures the daily stock performance of 500 leading companies in various industries of the U.S. economy. It’s calculated by using a base-weighted aggregate methodology; which means the level of the Index reflects the total market value of all 500 component stocks relative to a base period. Statisticians refer to this type of index, one with a set of combined variables (such as price and number of shares), as a composite index. Another popular index is the NASDAQ Composite. NASDAQ stands for the National Association of Securities Dealers Automated Quotation System. Unlike the New York Stock Exchange where trades take place on an exchange, NASDAQ is an electronic stock market that uses a computerized system to provide brokers and dealers with price quotes. The index measures the performance of approximately 3,200 stocks listed on its electronic exchange and is market-value weighted. This means that each company's security affects the Index in proportion to it's market value. The expression “a rising tide floats all boats” is often used to describe index performance. Keep in mind, however, that these indexes are only useful in gauging the overall performance of the markets in general which may or may not bare any resemblance to the performance of your personal portfolio depending upon which securities you own.▲

Investment basics...

Volume 18, Issue 3

January 29, 2007

Understanding Market Indexes