Frequently Asked Investing Questions
Here's A Q&A Of A Few Stock Market Basics
Here, then, are some investing basics questions and answers:
What is the stock market?
Stock markets are exchanges for the buying and selling of equities, or shares, in corporations. The two largest are the New York Stock Exchange and Nasdaq. Each works very differently. The NYSE takes orders from brokers, who transmit them via an order ticket to their representatives on the trading floor. The floor broker takes the order to the trading post on the exchange floor and completes the order. The price is recorded and reported on the ticker. Unlike the NYSE, Nasdaq has no physical trading floor.
How did the stock market do today?
Glad you asked! The information that you need is provided by this site. Simply go to the main Money or Business page by using the sidebar to the left, scroll down, and you'll see our thrice-daily stock report.
So, then, how are stocks traded on Nasdaq?
Nasdaq uses market makers, perpetually hyperactive humans who electronically compete with each other to offer the best bid/ask prices on stocks. If, for example, you want to place an order for 500 shares of stock in a given company, you call or electronically notify your broker/dealer, who then places a market order for the 200 shares. The order is executed by a market maker at the best (lowest) ask price.
Put a lid on the alphabet soup. What is Nasdaq, exactly?
Nasdaq is an acronym for the National Association of Securities Dealers Automated Quotation system. It is an electronic quotation system that provides security quotes to brokers and traders. Nasdaq consists of two markets. These are the Nasdaq National Market, with more than 4,400 securities pre-screened for financial resources and corporate governance, and the Nasdaq SmallCap Market, which has 1,800 listings of emerging growth companies.
Why is the Nasdaq considered a bellwether of the new economy?
While less than 30 years old, Nasdaq's emphasis on technology in the way that it conducts its business has attracted many rapid-growth technology companies that don't want to affiliate with what is often perceived as the rival New York Stock Exchange's bureaucracy. Because of the technology sector's rapid growth in recent years, many fast-growing companies -- with mercurial stock prices to boot -- have been found on Nasdaq by investors looking for rapid growth.
What is the Dow Jones Industrial Average?
The DJIA is an index of 30 "blue-chip" U.S. stocks. Here's the latest DJIA. When it rises, it simply means that the average price of 30 stocks from key industries is climbing. While individual stocks can rise in price even though the DJIA falls, it is a generally accurate indicator of how the stock prices of major companies in key industries are faring. A rise in the DJIA is good news for investors who hold these stocks.
What stocks comprise the Dow Jones Industrial Average?
AlliedSignal Inc., ALCOA Inc., American Express Co., AT&T Corp., Boeing Co. Caterpillar Inc., Citigroup Inc., Coca-Cola Co., Dupont Co., Eastman Kodak Co., Exxon Corp., General Electric Co., General Motors Corp., Hewlett Packard Co., Home Depot, Intel, International Business Machines Corp., International Paper Co., JP Morgan & Co. (they will likely be dropped and replaced on the list once their merger with Chase Manhattan Corp. is completed), Johnson & Johnson, McDonald's Corp., Merck & Co., Microsoft, Minnesota Mining & Manufacturing Co. (3M), Phillip Morris Co., Procter & Gamble Co., SBC Communications, Inc., United Technologies Corp., Wal-Mart and the Walt Disney Co.
I notice that the Dow has dropped today. Is this bad news?
Not necessarily. When the Dow falls, such as when interest rates rise and money that companies may want to borrow for necessary expansion will be more expensive to pay down, this might signify a buying opportunity for investors who are looking for bargains. The DJIA is the best-known market indicator in the world, partly because it is old enough that many generations of investors have become accustomed to quoting it, and partly because the U.S. stock market is the world's biggest.
What is the S&P 500?
The Standard & Poor's 500 Index consists of 500 stocks chosen for market size, liquidity and industry group representation. It is a market-value-weighted index (stock price times number of shares outstanding), with each stock's weight in the index proportionate to its market value. The "500" is one of the most widely used measurements of stock performance.
What is a mutual fund?
A mutual fund is a corporation that pools together investors' money generally to purchase stocks and bonds. You, as an investor, participate in the mutual fund by purchasing shares of the entire pool of assets, thus diversifying your investment. Professional managers who buy and sell securities on behalf of the investors invest the pooled assets.
What are the advantages of mutual funds?
With a mutual fund, you're buying shares of stock in a company. The company that you're buying is an investment company. Mutual funds are in the business of investing in securities, much like Microsoft is in the business of making software. Their assets are different, but they both are out to enrich their shareholders. When you invest in a mutual fund, you become a shareholder, and you can make money in several ways: off the interest and dividend payments made by the fund's underlying holdings, via the fund's trading activity, and as the fund's assets appreciate, and also from the value of the mutual fund's shares. Portfolio growth, while not guaranteed, can often be 20 to 30 percent a year.
Should I put my money in a mutual fund?
Mutual funds are a convenient way of diversifying your investments by type, and even by company. Because funds can hold anywhere from a few stocks to thousands, your risk is spread out more than if you invest directly in a company whose stock could founder. These funds are professionally managed by experts who keep close tabs on the fortunes of the companies in their portfolio. They are watching out for your investment with expert, practiced eyes. Also, mutual funds often buy and sell securities in volume. This lets you, the investor in the fund, benefit from lower management, research and trading costs.
What are the risks of a mutual fund?
Mutual funds can be risky investments. Although mutual funds are now being sold at banks, under no circumstance is a mutual fund an insured investment like a bank account, which enjoys protection from the Federal Deposit Insurance Corp.
Another disadvantage of mutual funds is that it's nearly impossible to tell if the fund is a good value at any particular point in time. Unlike stocks, where it is possible to tell if a stock is undervalued according to any of several different measures, it is much harder to determine if a mutual fund's net asset value represents a good value or not. A fund could have shown a solid rate of return for a particular period, but that could be a result of its holdings having reached peaks from which they might then plateau or decline.
Although most money market mutual funds are arguably as safe or safer than bank accounts, mutual funds don't guarantee that your original investment will be returned to you. So if mutual funds carry more risk than good old bank accounts, why do people bother to invest in them? The answer is simple -- higher potential returns.
What advantages do mutual funds have over individual stocks?
A mutual fund is a collection of stocks, bonds or other securities managed by full-time professional advisers who research and evaluate the markets every day. This is a big advantage if you don't have the time or interest to devote to investing. Plus, a mutual fund gives you instant diversification -- another big advantage. Since a mutual fund typically contains 50 to 100 different stocks or bonds, a big drop in any single stock in the fund won't be as damaging to your portfolio as it would if you owned only a few stocks.
Now you've learned or refreshed yourself on the basics. Happy investing!
