Wall Street, more specifically in the stock exchange, is a place where you can earn or lose money. Vast amounts of trading mean vast sums of money are being passed from one to another. The price of the stock likewise fluctuates as the stock market runs its course.
Understanding the intricacies of the stock market requires more than just the necessary finance and economics class. It requires special skills in assessing risks and returns for your investment. Of course, you want to earn. So, your goal is making sure that the return on investment should be positive.
Behind the scenes are the people that make sure you assess the risk and return of your investment correctly. A stock market index is a dynamic tool that makes investing for beginners and professionals easier. Numerous indices are being used today. The Down Jones, S&P 500, and NASDAQ provide information that is pivotal in Wall Street and stock exchange. Dow Jones, S&P 500, and NASDAQ have each a list of companies that are publicly traded.
Moreover, each maintains a specific number on their list. Dow Jones, for example, has 30 publicly traded companies in its listing. On the other hand, the S&P 500 has 500 companies on their list. Also, they have their own way of computing how the stock market fairs.
There are times when a company is dropped from the list. Losing may be due to mergers and acquisitions, or at times due to bankruptcy. Regardless of the reason, they need to be replaced.
Replacing the dropped company is very important. The purpose of this activity is to maintain absolute validity and reliability in their computations. Through an index committee, a replacement company will be named.
There are no nominations from brokers or companies. Only a risk and return assessment are made. It is more than just considering the price of the stock or the return on investment. Though the process may be different for each index, it follows similar principles.
First, they look into the market value of the company. Investing in corporate bonds and stocks must yield something positive. Second, the stability of the company must be established – e.g., financial and organizational stability. Being able to withstand any market crash or economic predicaments is a good indicator of strength. Third, having a solid trading history is essential. Lastly, it is definitely a plus that the industry must play an essential part in the economy.
By carefully considering the indices given, investing for beginners becomes easier. Though a stock market simulation can yield more precise results than just looking at the index, people still refer to these indices for guidance. Just to put things in perspective, Dow Jones has been giving stock market indices since 1896.
Furthermore, since each index is computed differently, the price of the stock, the risk, and return, and other investment decisions may differ. As such, a deeper understanding of each factor will be beneficial, especially when comparing and contrasting indices.
Wall Street need not be complicated if you simply learn more about the stock exchange.