Forex Investment and Currency Trading

You hear every day that the market is up or down. Have you ever paused to wonder what “the market” is? Usually that phrase refers to the U.S. stock market s measured by the Dow Jones Industrial Average, often abbreviated DJIA or called simply the Dow. The Dow is not the entire market at all, but rather an average of 30 well-known companies such as IBM, McDonald’s, Microsoft, and Wal-Mart. The companies tracked by the Dow are chosen by the editors of The Wall Street Journal. The list changes occasionally as companies merge, lose prominence, or rise to the top of their industry.

The Dow is an average. Average and indexes are just ways for us to judge the trend of the overall market by looking at a piece of it. The Dow is the most widely cited measurement, but not the only gauge of the market. A more popular index among investors is Standard & Poor’s 500, or just the S&P 500. It tracks 500 large companies that together account for some 75 percent of the entire U.S. stock market. The S&P MidCap 400 tracks 400 medium-sized companies while the S&P SmallCap 600 tracks 600 small companies. The NASDAQ 100 follows 100 top stocks from the NASDAQ such as Adobe, Amgen, Apple, Costco, eBay, Intel, Microsoft, Oracle, and Starbucks. It’s one of the hippest indexes around, although, with its focus on tech and biotech, also one of the most volatile.

There are dozens of other indexes that you will encounter as you dig deeper into the world of investing. Each is an attempt to monitor the progress of a market by looking at a sliver of that market.

You probably already use indexes in other parts of your life, although you might not know it. We create them all the time to help ourselves compare different values. For example, let’s say you are interested in buying a new Toyota Camry. If one of your main selection criteria is fuel economy, how do you know if the gallon number to the average miles-per-gallon number of other midsize passenger cars, such as the Ford Fusion and the Honda Accord. After several comparisons, you know what is a good number, what is average, and what is below average. Notice that you don’t compare the Camry to a Hyundai Accent or a Chevy Suburban. Those vehicles are in different classes and are irrelevant to your comparison. Thus, in this case, midsize passenger cars comprise your index.

As you encounter different market indexes, just remember that each looks at a piece of the market to monitor how that part of the market is performing.