How to Track the Stock Market
When I taught lessons on the stock market, the first lesson boiled down answering the simple question, “What makes up the stock market? How do I track ‘the market’?”
This is critical to taking the first steps into understanding the market as a whole, because if you don’t know what to look at, how do you know what the heck is going on? Let’s explore.
A Market Index
First thing is first, when you talk about the stock market, you refer to a market index. An index in the stock market is a group of stocks combined together to give a broader perspective and outlook. So, let’s say that you walk new ice cream store, and decide to taste test 9 of the 10 flavors present. Well, if 8 of them taste horrible, then it would be easy to say that the ice cream store AS A WHOLE wasn’t too good. This is the same concept for market indices (spiffy way of saying “indexes”), they have a variety of different stocks within each index, and by tracking their individual performances you can get a glimpse of the group AS A WHOLE.
Three Major Indices
With that said, when it comes to talking about the market as a whole, you are 99.9% of the time going to refer to one of three following major indices:
- The S & P 500
- The NASDAQ Composite
- The Dow Jones Industrials
The S & P 500 is the most widely referred to index for tracking the stock market as a whole. In fact, many will tell you that it simply IS the stock market. The index itself is made up of 500 different stocks all weighted within the index proportionate to their market value. To determine what stocks are included in the index, a team of analysts and economists at Standard & Poor’s make the calls.
Bottom Line: The above three indices are the most widely referred to when it comes to talking about the market as a whole. The S & P 500 is the benchmark for professional traders meaning it is the index everyone competes against each year. If you do better than the S & P 500, than you in theory, “beat the market”.
(Extra Help: I suggest checking out the stock education archives for more information on the stock market as a whole.)
I really liked your ice cream store analogy. I would the following:
If you take too much of the same ice cream at the same time, you might have a brain freeze or feeling like you are about to fall.
haha, thanks man. ya, perhaps I should write a disclaimer about eating too much ice cream at once