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How are Markets Measured?

If you turn on any financial news channel or program you will hear the commentators speak about the Russell 5000, The S&P 500, Nasdaq, FTSE (Footsie) Dow Jones, NYSE (New York Stock Exchange) etc,  What are these?  Why are they important?  First lets take a look at actual "Stock" exchanges. There are certain areas where people went to exchange "Stock"  as in livestock, chattle and other goods and services.  One of these in New York City was located on Wall Street.  As it grew, it became one of the global financial centers of the world along with London, Berlin, Hong Kong, Toronto, Chicago, Tokyo, and Amsterdam.  Each city had their own exchange, some like in Chicago specialized in certain things like commodities, pork bellies, Orange juice futures, and others like in Nebraska were for grain, wheat and barley.  Each of these centers as they grew got a name or nick name.  New York of course Wall Street, London Footsie (or FTSE) later as other exchanges were created in the computer age like NASDAQ their is no central location it exists solely now on the web.

There are certain "Indices" that follow what stocks trade on these exchanges.  The most common in the United States would be Dow Jones Industrial Average (DJIA), NASDAQ, S&P 500 and Russell 5000.  Of course these Indices attempt to measure the productivity of the corporations, and over all health of the economy of the United States and determine if the economy is expanding (booming) or contracting (recession).  We are going to take a look at the 2nd oldest the Dow Jones Industrial Average (oldest is Dow Jones transportation average).

Why do they call it Dow Jones what does that have to do with Wall Street? 

Two men back in 1896 began to measure the market with 12 stocks that were industrial in nature.  This was Charles Dow and Edward Jones so when you start something you get to name it; Dow Jones.   The Dow Jones contains 30 stocks total and of all the 1000's of companies out there it is a really antiquated measure of the overall health of the economy but yet no one wants to seem to abandon it.  Really the S&P 500 and Russell 5000 are much better averages.  The 30 stocks that make up the DJIA are really not industrial anymore at all.  The only original stock still in the average is General Electric, other companies like AT&T that were in the average are still around and exist but AT&T was replaced several years ago by Apple.  The average in its basics is that if you own 1 share of these 30 stocks it would now as of this week be valued somewhere around 22,000

Wait I added up these stocks it doesn't match your $22,000 number?

Very true, it is based upon a formula actualization that also takes into consideration stock splits and dividend payouts and a few other factors, but for our purposes that is not really important.  Well if you are an Actuary then to you it probably is really important.

Here are the 30 Stocks that currently make up the DJIA;  I bet these names are familiar?

3M, American Express, Apple, Boeing, Caterpillar, Chevron, Cisco Systems, Coca Cola, Dow Dupont, Exxon Mobil, General Electric, Goldman Sachs, Home Depot, IBM, Intel, Johnson & Johnson, JP Morgan Chase, McDonald's, Merck, Microsoft, Nike, Pfizer, Procter and Gamble, Travelers, United Healthcare, United Technologies, Verizon, Visa, Walmart, and Walt Disney.

These stocks are also called "Blue Chip" stocks this means that you can invest in any of these 30 companies and be pretty well assured your investment isn't going to go bankrupt any time soon.  I say that with a grain of salt because any investment in stock there is a risk.  With that risk can come a great reward.  However companies in the past like Enron and Worldcom were great companies up until the day we learned insiders cooked the books and the value fell out, and fell out quickly.  During the "Global Financial crisis of 2008-9"  as they now call it, this happened to Lehman Brothers, and if President Obama had not stepped in General Motors, Bank of America and many other companies would have collapsed also and your ownership in those stocks would have plummeted also.

So remember you can now listen to them report on these indices and get an idea of how the markets are performing around the world.  The CNBC.com website even provides a heat map that can show you the economic changes over the whole world.  Remember do not be afraid and go out and learn either on this website or by exploring these financial sites.  This does not have to be scary territory that only rich billionaires can tread, after all billionaires like Warren Buffett made his fortune by learning and discovering these same tools I am sharing with you now.
 

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