Money Matters

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Everyone’s talking about the Dow, but what does it mean?

Provided by RBC Wealth Management
and Dave Dupont

Turn on any news channel, open the financial section of the paper or click on your favorite news website and you are bound to hear about records being broken on Wall Street. So what do these indices and numbers really mean?

Standard & Poor’s 500

The Standard & Poor’s 500, also called the S&P 500, is weighted by market value and its performance is thought to be representative of the stock market as a whole. The index provides a broad snapshot of the overall U.S. equity markets with 500 stocks that account for 70 percent of U.S. equities. Selected stocks are based on market size, liquidity and sector with most stocks representing large-cap or mid-cap corporations. When news or analyst research reports say the stock market gained or lost ground, it is based on the S&P.

Dow Jones Industrial Average

In contrast, the Dow Jones Industrial Average, commonly referred to as the Dow, represents 30 actively traded blue chip stocks and is only a small sample of the stock market as a whole. Created in 1896, it is the most widely used indicator of the stock market and the number that usually makes headlines. The stocks that make up the Dow are primarily industrials but it has gained technology stocks over the years.

NASDAQ

An acronym for the National Association of Securities Dealers Automated Quotation System, NASDAQ is a computerized trading system. Unlike the American Stock Exchange (Amex) or the New York Stock Exchange (NYSE), the NASDAQ doesn’t have a physical trading floor. NASDAQ quotes are a composite of approximately 5,000 stocks traded on its system.

Understand historical triggers

The Dow, S&P and NASDAQ are good indicators of the overall market but it is important to understand what affects the numbers. In 1929, speculative investing in a rising market led to panicked selling during a downturn. The Dow fell 38 points, 13.47 percent, on October 28 and another 30 points, 11.73 percent, on October 29, signaling the beginning of the Great Depression.

Yet, the numbers pale in comparison to Black Monday on October 19, 1987, when the Dow fell 508 points or 22.61 percent. Rather than human reaction, this was thought to be caused by program trading, computers performing rapid stock executions based on external data.

In 2008, the biggest financial crisis since the Great Depression hit the United States. A meltdown in the financial industry led to the Dow’s largest one-day point loss of 777 at the end of September followed by the largest one-day point gains of 936  only two weeks later.

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