It is very likely that you have heard people refer to “the market” and have probably even used the phrase yourself. However, does anyone actually know what they mean when they say, “the market”? We often say “the market is up!” or “the market just crashed!” but that doesn’t mean a whole lot if we can’t define the term. Undoubtedly, you have also heard about the various market indexes but what exactly are those and are they at all relevant to your personal finances? Let’s answer those questions starting with the two primary markets that you are most likely to have heard of or interacted with in regards to your investments.
“The market generally refers to two key stock exchanges namely the New York Stock Exchange and the Nasdaq. The New York Stock Exchange or NYSE is the largest stock exchange in the world and was started in May of 1792. When you hear people talking about the market or Wall St., generally that is a stand in for the NYSE. The Nasdaq is the second largest stock exchange in the world and was the very first electronic exchange in 1971. It is also located in NYC and has become the exchange of choice for many technology and biotech companies. So, what exactly is a stock exchange? Well, the exchanges act as the primary marketplace for the buying and selling of stocks, bonds, ETFs and other financial products. When a company wants to issue stock in an initial public offering or IPO the exchanges are where they go to do that. Likewise, if an investor wishes to purchase an initial offering of stock from a company, the exchanges would be the medium for them to make that purchase. The average investor purchases investments from other individuals or businesses but the exchanges are where all the action begins.
Now that we have defined what the exchanges are and what their role is in the investment world, the question is how does that help us understand “the market?” When you hear people saying things like “what did the market do today” or “how has the market performed this year” what on earth are they talking about? Well, the ever changing values of the companies listed on the exchange, are tracked and monitored by what are called market indexes. In general, the market indexes display the current prices of the stocks or bonds that they track in real time. Different indexes track different stocks but the three most followed indexes are the Standard and Poor’s 500 (S&P 500), Dow Jones Industrial Average (DJIA), and the Nasdaq Composite (which essentially just tracks the price movement of the Nasdaq exchange as a whole). Whether or not an index is relevant to your investment portfolio depends entirely on what you are invested in. For example, the S&P 500 would be a good gauge of your investment performance if you held mainly large company stocks whereas the Nasdaq Composite might be a better option if you had a significant percentage of your holdings in biotechnology companies.
This leads us to our most important point of the blog post! While these indexes can give you a general sense of where the economy is heading or how your investments are doing, you should really rely on your own plan and investment strategy for decision making. Understanding what the market is and how it works is great and worthwhile knowledge. However, what you do with that knowledge is far more important. Remember not to let yourself succumb to fear when your account value is dropping or be seduced by the allure of greater returns when the market is rising. At this point I am probably beginning to sound like a broker record. However, I say again, STICK. TO. YOUR. PLAN!
All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.