Whenever you turn on the TV or read a newspaper you will undoubtedly see someone talking about how the “markets” are up, down, flat, upbeat, sad, or some other kind of movement or mood description.
However, what do they really mean when they are talking about the “market”? They are not talking about the local grocery store’s traffic or the overall economy. Rather, the “market” is a broad, but particular, snapshot of the investing world.
The Market Is Everyone – Kind Of
When used in a general sense, the "stock market" means the actions that the public are taking as a whole, through stock exchanges like the New York Stock Exchange or NASDAQ. Every buy and sell order placed by anyone, whether a small retiree or a large institutional pension fund, becomes part of the market on that day.
A stock index is a collection of a variety of stocks and can therefore serve as a good representation of that market as a whole. Certain indexes, or measurements that combine a selected variety of stocks, give a picture of how the overall market, or certain parts of it, are doing. These indexes include more famous ones such as the Dow Jones Industrial Average (DJIA) and the S&P 500, as well as lesser known ones like the Wilshire 5000.
The way the markets are moving may affect individual stock prices and provide important indicators about the economy. Similarly, the way individual stock prices move and how the economy is doing may affect the overall market itself as well.
What the Markets Are Not
Normally references to the market do not include investing activities that are not accessible to the public. These include activities such as private-equity, venture capital, and other transactions and deals that take place privately between only selected actors.
How Markets Move
When someone says “the market’s up”, they mean that on aggregate all the individual stock moves, both up and down, net a positive move for major indexes. Similarly, when someone says “the market’s down”, or “flat”, that is a description of the overall sum of the individual stock movements.
It is important to note that an individual stock’s movement does not have to coincide with the market’s direction on any given day. Although in some cases, a big move in large company stocks can sometimes result in the entire market being up or down that day. For example, Apple is a large component of the Dow Jones Industrial Average.
If Apple were to post expectation-beating earnings and soar several percentage points, the entire Dow Jones Industrial Average might show a sizable increase on that day, even if all the other stocks that are part of the Dow are not moving so positively.
Markets On a Broader Scale
Now, stocks are not the only financial asset that one can trade. The broader term "securities" is used for any financial asset that is tradable such as stocks, bank notes, bonds and derivatives. So depending on the kind of securities one is talking about, markets can also have more specialized meanings. For example, if someone invests largely in bonds, then when they refer to the “market” they might be talking specifically about the Treasury Bond Market or an index like the Barclays Capital U.S. Aggregate Bond Index on that day.
Why should I care about Markets?
If you are investing in individual stocks then following the overall market moves daily or weekly gives you a way to see how you fared relative to the broader picture.
If you are investing with longer term goals in mind, like retirement or college for your kids, then day to day market moves should not matter to you much. Having said that, the long term market’s performance IS important to you as it is one of the factors that will determine how quickly you will be able to reach your goals. If the S&P 500 delivers 5% total returns per year for the next 10 years vs. the annual 7.5% we saw the last decade, it would mean you would need to save more each year in order to achieve the same outcome.
How to Follow Markets
For more details on the stock and bond markets, and a comparison between saving and investing, download our free Investments 101 Ebook.