First, what exactly is the stock market? The stock market is a generic term that encompasses the trading of securities. This trading takes place in stock exchanges. There are three major stock exchanges in the United States:
Formed in 1792, the New York Stock Exchange (NYSE) is the largest organized stock exchange in the United States.
The American Stock Exchange (AMEX) was known before 1951 as the American Curb Exchange. That’s because trading was conducted on the curb of Wall and Broad streets in New York City. The American Stock Exchange has less stringent listing requirements than the NYSE, so it attracts many smaller companies. Another of the major stock exchanges, NASDAQ stands for the National Association of Securities Dealers Automated Quotation System. Unlike the NYSE and the AMEX, there isn’t any physical location for the exchange; trading is done by computer. The American Stock Exchange and NASDAQ have merged, but maintain their own names and identities.
The overall performance of the stock market is evaluated in many different ways. The Dow Jones Industrial Average (DJIA) is one measure of the stock market, the standard we hear every day. It consists of three indices that include averages for utilities, industrial, and transportation stocks, as well as the composite averages. Each average reflects the simple mathematical average of the closing prices (prices at the end of the day) and indicates the day-to-day changes in the market prices of stocks in the designated index. Okay, what does that mean? The DJIA is a composite (group) of 30 stocks with a daily average. Tomorrow, if the stocks as an average go up in price, the DJIA goes up. If the average value of these selected stocks goes down, the DJIA goes down. If market trends are moving increasingly upward, as they did in the latter part of the 1990s, it’s called a bull market. Market trends that are moving continuously downward, such as they have since the middle of 2001, are called a bear market. Now that you know the major exchanges and how the market is measured, let’s get down to business. How do you make money on this deal? There are two kinds of investment returns: total return and yield. Total return on an investment is the current income, plus the capital gain or loss. Yield is the amount of dividends or interest paid on an investment. These returns can be very different, although many people lump them together as the same thing. Every investment you make involves a certain level of investment risk, with the chance that you’ll lose the money you invest or that the investment won’t perform as well as you thought. Investments with the chance for higher returns carry greater risk than those without the return potential. Although the terminology involved can be a bit baffling, the basic concept of investing isn’t all that complicated. You can buy something with your money: a little piece of a company as shares of stock, or some real estate, or something else. Or you can lend your money to an organization and have it agree to pay you back, with interest, over a specified time. When it comes to investing, you can own, or you can loan.
