When They Say “The Market,” What Do They Mean?

When They Say “The Market,” What Do They Mean?

"The market has soared on strong earnings."

"The market has plunged on concerns about European debt."

"The market is moving sideways, awaiting the latest economic releases."

Turn on the TV or computer on any given day and you are likely to hear one of the above three phrases. But what is "the market"?

The Market Is Like a Shopping Mall for Investments

The market is a generic term used to refer to a place where various types of investments (stocks, bonds, commodities, etc.) are bought and sold. Years ago, these transactions were conducted in person. Today, the vast majority of this activity occurs electronically, with much less human interaction. In many ways the market is very similar to a mall. At the mall, some stores sell clothes. Some stores sell electronics. Some stores sell books. The categories of goods sold in investment markets include stocks, bonds, and commodities. The different types of clothes, books, and electronics sold in the stores at the mall are akin to the individual issues of stocks (Google, Pepsi), bonds (US Treasuries, Corporate Bonds), or commodities (crude oil, soybeans) sold in "the market."

Just Like There Are Several Types of Malls, There Are Several Types of Markets

There are specialty boutique destinations like the Shops at Time Warner Center, huge malls like the Mall of America, and ubiquitous little collections of strip malls. The same goes for investment markets. When you hear major news outlets talking about "the market," they are typically referring a specialty boutique market called the "Dow Jones Industrial Average." The Dow Jones market sells stocks for 30 large, well-known industrial companies. Another commonly cited boutique market is the NASDAQ, which contains primarily technology companies. Then there are some "broader markets" which are more like the Mall of America: the S&P 500, which tracks a wide range of 500 large publicly traded companies, and the Russell 2000, which tracks an even wider swath of comEpanies including smaller ones than there are in the S&P 500. There are also (less widely referenced) markets that track what's going on in the sale of bonds and commodities. They’re somewhat akin to malls with specialty goods... and therefore a bit off the beaten path for the typical LearnVest reader.

When You Hear About "The Market," It’s Usually Referring to the Dow Jones

Just like you couldn't possibly keep track of what's going on in every single mall across the country, it would take all night to summarize the day's activity on all the different investment markets. So, the current norm is to refer to the performance of the Dow Jones. If not the Dow, the other two most commonly cited stats are for the S&P 500 and the NASDAQ. And, yes, there are companies in these markets that do sell shoes, including Wal-Mart in the Dow, Coach in the S&P, and eBay in the NASDAQ!

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