A successful stock market is critical for companies seeking investment dollars to grow their operations, and equally critical for consumers to be able to invest their money and grow their wealth.
We’re going to take a look at what the stock market is, how it works, and how stock market indexes come into play.
What is the stock market? The stock market is where you buy and sell shares of publicly traded companies.
To participate in the stock market you can buy/sell shares directly, or do so through other financial instruments such as funds.
How Does the Stock Market Work?
Stock markets provide a secure and highly regulated environment where people can buy/sell financial securities such as stocks and funds.
The stock market is pretty much a fancy auction house. You have a bunch of people selling shares of companies, and a bunch of people looking to buy them. When a seller and a buyer agree on the price, then a transaction happens.
Now don’t be scared. You don’t actually have to haggle with other people over the price. If you’re looking to buy, then you can just set a price you’re willing to pay for a particular stock, and the stock exchange system will match you with a seller if they are willing to sell at that price – and vice versa if you’re a seller.
The stock exchange keeps track of the supply, demand, and current transaction price for each listed stock. Usually, the price of a stock will go up if there are more buyers than sellers, and go down if there are more sellers than buyers. It’s all about supply and demand.
So what are these stock exchanges? These are the actual systems that allow stock transactions to happen. The most famous exchange in the world is probably the New York Stock Exchange (NYSE).
If you’re buying stocks online (which everyone should be doing), then you don’t have to worry about which exchange a certain stock is on. You’ll be able to search all of them.
What is a Stock Market Index?
On the news they often say things like “The stock market is up today!” and reference indexes such as the S&P 500 and the Dow Jones Industrial Average.
What is a stock market index? A stock market index is a group of stocks that measures the overall stock market or a specific segment. The goal of an index is to give you a good idea of how the particular market is doing.
For example, you might have a stock index that tracks thousands of companies in the United States, or you might have a stock index that tracks only tech companies in Europe. The great thing about stock market indexes is that they often have a long history so you can see how a particular index has performed over several decades, and sometimes over a hundred years.
There are tons of stock indexes out there, but here are the most popular ones:
What is the S&P 500? The S&P 500 index is considered the best representation of the overall US stock market as it follows the performance of the 500 largest companies in the United States. The earliest version of this index started in 1923 by tracking 233 American companies. Some of the biggest companies tracked on this index include Berkshire Hathaway, Visa, and Disney.
What is the Dow Jones Industrial Average? The original Dow Jones index started in the 1800’s. Today, it is an index made up of 30 large companies in the United States. Even though it’s called the “industrial average” it does contain tech companies – “industrial” is just a term leftover from the 1800’s. Some of the biggest companies on the Dow include Boeing, ExxonMobil, and Microsoft.
What is the NASDAQ? The NASDAQ Composite Index tracks over 2,500 stocks that are listed on the NASDAQ exchange. This index was started in 1971. Some people prefer to use the NASDAQ-100 index rather than the full 2,500+ stock index as the NASDAQ-100 has a 90%+ correlation with the overall NASDAQ Composite Index. Some of the biggest companies on the NASDAQ include Apple, Amazon, and Facebook.
What is the Hang Seng Index? The Hang Seng 50 Index tracks the performance of the stock market in Hong Kong. The index covers 50 large companies, and was started in 1969. This index is popular for investors looking for exposure to the Asian stock market. Some of the biggest companies on the Hang Seng include Bank of China, Tencent, and Yangtze Power.
What is the SSE Index? The SSE Composite Index tracks the entire Shanghai Stock Exchange in China. Since its inception in 1990, it has been one of the best indexes for getting exposure to companies in mainland China. Some of the biggest companies on the SSE Composite Index are PetroChina, Daqin Railway, and Ping An Insurance.
What is the Nikkei Index? The Nikkei 225 Index tracks the performance of 225 companies on the Tokyo stock exchange, and was started back in 1950. If you’re looking for exposure on Asian stocks but want to stay out of China, then this index is your best bet. Some of the biggest companies in the Nikkei 225 Index include Panasonic, Sony, and Toyota.
Now that you have a fantastic understanding of what the stock market is, you’ll need to decide what to buy. Check out our must-see resources for understanding the financial market below: