Dow Jones Industrial Average Explained

We see the numbers nightly on the evening news. The Dow Jones Industrial Average may be up 100 points one day, down 30 the next. But what happens when the Dow rises 100 points? Is that a good day? Or just an average one? Measuring the markets can be a daunting task if you don’t know what to look for.

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Actually the Dow Jones Industrial Average (sometimes known as the Dow 30, the Blue Chips or just the Dow Jones) is only one of several markets on Wall Street. Every evening, with the Dow numbers, you may see the NASDAQ or the S&P 500. These are some of the other markets. But it is the Dow 30 that is the most recognized and most talked about market.

A journalist named Charles Dow first created the market indicator. In the late 1800’s, people on Wall Street found it difficult to interpret the clutter of numbers tossed around on a daily basis. Some companies would be up an eighth of a point or down a half. It was easy to tell how a company was doing if it had a string of down days, but it was much more difficult to figure out how the market was doing as a whole. On May 26th, 1896, in an attempt to clear the confusion, Dow started putting out a nightly report in which he combined the daily results of 11 stocks. Railroad industries were the big traders of the day, but when utility companies started to come along, the number of industries in the report jumped to 20. Today, the Dow holds 30 companies. You probably recognize most of them. They are some of the biggest names in American business- General Motors, Microsoft, Coca Cola, 3M, Disney, IBM and Exxon are just a few. It is a rare occurrence for these businesses to change. Coca Cola has been listed since 1932. We’ve seen GE since 1907. This is why the Dow is the most talked about market on Wall Street. Because these are the most established business in the country, the Dow30 provides the best indicator of how the market, as a whole, is doing.

Historically, there have been good times and bad times for the Dow Jones. During the Great Depression, the markets were performing so poorly, and so many people were losing all the money they had, some turned to suicide. It was only after the bombing of Pearl Harbor and the start of World War II, that the markets started to turn around. The call for war supplies boosted many industries and secured their bottom line. During the economy boom of the late 90’s, the Dow traded around 11,500. However, just a couple of years later, in the middle of an economical recession, it hovered around 7,500.

Daily, investors buy a tiny piece of these Blue Chip companies. These pieces are called shares. The value of these shares goes up or down depending on how many people buy or sell these shares. If several people buy shares of the company on a particular day, the value of one share will go up. If several people sell shares, the value will go down. For example, if you buy 1 share of “Company X” at $10, and over the course of the day, the value of the shares go up to $11, you just made $1. Many times, these numbers are reported in percentages. In this example, “Company X” gained 10%. However, if the value of the share goes down to $9, you lost $1 or 10%. Easy, isn’t it? This is the simplest of examples, however. Companies in the Dow see millions and millions of shares exchanged in a single day. Generally, if the company is doing well, more people will buy shares, and the value will go up. However, there are several factors that decide if a company is doing well. If a report comes out stating “Company X” didn’t reach their sales goals for a particular quarter, investors might see that as a bad sign and start selling shares. This would decrease the value of a share. If “Company X” surpassed their goals, investors will see that as a good sign and buy more shares, thus increasing the value. If only it were that easy. Because companies can’t control what people think, many times companies have little control of the value of their company. For example, let’s say both “Company Y” and “Company X” sell widgets. If “Company Y” sees a bad earnings report, investors might see that as a bad sign on the entire widget industry, and start selling their shares of “Company X” as well. World events also play a major role on how the markets do. Usually, these events have a negative affect on the market initially. Sometimes, the market recovers within a couple of months. Sometimes they don’t. The day a gunman assassinated President Kennedy, the Dow fell 2.89%. A year later, the market gained 21.58%. The day the Federal Building in Oklahoma City was bombed, the Dow gained .68%. One year later, it was up 14.07%. On 9/11, the market fell 7.12% and was still down 10.66% a year later.

Sometimes, companies reward their investors by splitting a portion of their profits. These are called dividends. If 10 people own 1 share of “Company X”, and “Company X” makes a $100 profit, each investor would get $10. Again, this is the simplest of examples, as the Dow 30 companies each have millions and millions of outstanding shares. IBM, for example, has somewhere in the neighborhood of 1.7 billion outstanding shares. That means, a dividend for a single share is usually only around a couple of cents. So which companies offer dividends, and which don’t? That’s up to the Board of Directors of each company. Some companies share their profits. Others think it is a better business move to reinvest their profits to make the company better- thus raising the value of each share.

Many people spent hours a day studying companies that are poised to make a significant gain. The nice thing about the Dow 30 stocks is that these are usually a safe bet. Most people don’t expect Coca Cola to go out of business any time soon. Even if they have a bad couple of quarters, these companies have proven leadership that will eventually turn the company around. They wouldn’t have lasted all these years if they didn’t. So with thousands and thousands companies trading on Wall Street, you now have a better understanding of what all those numbers mean, the next time you see them on the evening news.

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Make your Choice on Mutual Fund

There are thousands of mutual funds to invest your money in. So how do you pick one over the other? Here are some things to look for when making your choice:

• Fund Performance. The single most important measure to consider is how the funds have performed over time. Check the three- and five-year annual return (and ten-year if available) and see how well it’s done through the years. Anything that has returned at least 10% or more per year over a long period of time would certainly be worth considering.
• Fund Management. The next thing to look at is how long the current management has been managing the fund. If a fund has returned 20% a year for the past five years, and the current manager is the one who managed it for those entire five years, you should certainly feel comfortable with that person’s skills. If the fund returned 20% for four years and 3% last year, and the current manager just took over last year, I’d be skeptical until he’s managed it a few more years.
• Volatility. The most volatile funds (like aggressive-growth) will return more in the long run, but will also drop more on bad market days. If you can stomach volatility and are in it for the long-haul, go with a more volatile fund. If you are in it for the short-term or just can’t stand to see your fund go down even for a day, get into something more conservative.
• Cost of getting into a fund. Every fund will have an expense ratio. This is the percentage of the fund’s money that is deducted each year for the fund manager’s salary, mailings, marketing, and other costs. As long as the ratio is in line with most other successful funds, I wouldn’t be concerned about it. If it’s extremely high compared to others, I would certainly expect a much higher return than other funds. Also, you need to be concerned with whether the fund is a “load” or “no-load” fund. In other words, do you have to pay (load) to get into the fund or is there no cost to get in (no-load)? There are many successful no-load funds to get into. I’d only get into a loaded fund if it has produced exceptional returns year after year.

All of the information I mentioned above on mutual funds can usually be found in a special mutual fund issue published at the beginning of each year by Kiplinger’s or Money Magazine. Using those sources, along with asking a financial professional should help you pick the fund that is right for you.

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Finance Tips for Stock Market Investor

So, you're ready to dive in and become the next Gordon Gekko. Alright! Time to get on the wait list for that Rolls Royce Phantom, right? Not so fast. Stock picking is tricky business and is, frankly, not for everyone. Many newcomers have discovered just how fast their life savings can evaporate, and that's a lesson you probably don't want to learn first-hand.

The Stock Market Investment by Richard J. Teweles, Edward S. Bradley Packed with clear definitions, cutting-edge strategies, and helpful examples, this new edition provides in-depth information on topics that have changed how stocks perform, as well as how they should be handled. In addition to the globalization of the securities business, regulatory changes, program trading, and advances in online services, you'll find details on key developments in several important areas, including the derivatives market, index fund investing, and technical and fundamental analysis.

But let's start on the other end; your financial situation. Before you plunk a single cent into the stock market, you should take a hard look at your other assets, debts and financial obligations. If you have thousands of dollars in revolving credit card debt (i.e. you don't pay your balance in full each month), the wisest investment you can possibly make is to pay that off first. Why? Since credit cards typically charge some 15-20% interest, any investment you'd make instead would have to have a guaranteed return of at least as much - and there's no such thing.

Other types of debt, such as mortgages and student loans, are less of an emergency. Mortgages are tax-deductible (as opposed to credit card debt) and student loans generally have generous terms. Some like the peace of mind that comes from being entirely debt-free, but it's not really important once you've cleaned out the credit cards. Car loans is a gray area - if you got a good deal, it's ok, but if the dealer slammed you with a high interest loan you're wise to pay it off.

How The Stock Market Works by John M. Dalton Explains the workings of the securities industry, including the initial public offering, types of stocks, who's who inside the brokerage firm, back-office operations and investment analysis. This new edition includes new chapters that cover ongoing changes at the NYSE, the AMEX, Nasdaq, online trading and the globalisation of the stock market. It has been thoroughly updated to reflect changes that have taken place on Wall Street and in the way securities transactions are conducted.

Next, make sure you have a sufficient cash cushion for emergencies. Remember, the stock market goes up and down. If you get laid off or have a sudden big expense dropped in your lap, you may have to sell your stock at the worst possible time. By keeping 3 to 6 month's worth of living expenses in a savings account or money market fund you can handle the curveballs life throws at you without the added grief of losing money in the stock market.

Last but not least, do you have the nerves for stock investments? If the market takes a sudden plunge and you see thousands of hard-earned dollars disappearing into a black hole, will you panic and sell at a loss? Will you be stressed out at the expense of work and family? Will you check the online stock tickers every hour to track your investments? If you said yes to any of the above, you may want to stick with treasury bonds, Certificates of Deposits (CDs) and other safe investments where you have a modest but guaranteed return on investment. You probably won't make as much money in the long run, but at least you'll sleep well at night.

Ok, now that we have the fundamentals out of the way, let's focus on the actual investing. If you are fresh to the game, you may not want to jump off the deep end and try to pick the next Microsoft out of the thousands of publicly traded stocks. By investing in an index fund or a stock mutual fund, you can be part of the stock market drama without having to lift a finger once you've mailed in your check.

Index funds are pre-packaged baskets of stocks that follow the market ups and downs in lockstep. The S&P 500 index funds, for example, invest in the 500 largest US companies. That's it. There is no team of bean counters and analysts working the phones all day long trying to catch the latest trends. The fund simply buys shares of those 500 companies and does absolutely nothing else. When you buy into the fund, the fund buys a tiny bit more of each other 500 companies, and when you sell your share of the fund, it sells a tiny bit of each company.

This is obviously not very exciting, but it has the advantage of low cost (since there are no analyst salaries to pay, the fund companies can offer very low management fees). Another advantage is that your odds of long-term gains are pretty good. History shows that someone who plunked down money in this type of fund in the 1950s and sat on his hands through ups and downs would have an average annual return in excess of 10% by now.

You can also buy index funds with a more narrow scope, such as small-cap (smaller companies), but the principle remains the same. The smaller index funds are typically more volatile (higher possibility of bigger gains or bigger losses) which can be an option if you feel that a specific section of the market has better potential than others.

Another route is the regular stock fund, where you pay a bit more in fees to have the analysts try and beat the market. Some succeed and reward their investors handsomely, others lose a big gob of dough even though the rest of the market is heading up. The most important thing to realize here is that last years winner isn't necessarily this years winner. In fact, if a fund brags about having returned so-and-so much last year, they probably took great risks to achieve such spectacular results. That's the bummer about risk; the more you stand to gain, the more money you'll lose if the fund manager is wrong. Simply put: avoid the hotshots and seek out the mature funds with competent, experienced managers and a track-record of moderate but consistent gains.

If you decide to try your own hand at stock-picking, get an online discount broker such as Ameritrade, E-Trade, Scottrade or Sharebuilder. These offer cheap trades (less than $30) while many also provide basic research tools. If you pick a broker that doesn't offer research tools, don't fret - there are tons of free websites that will help you get started. However, no tool will replace your most important asset: your mind.

Getting good at identifying strong companies with good growth potential takes years and requires a lot of homework. Tons of books have been written on the subject, most of which are fads and shortsighted baloney. Start with down-to-earth books like Investing for Dummies and the like, and don't forget to tap the power of the Internet. The Motley Fool (www.fool.com) is a great place to start for beginner do-it-yourself stockpickers.

Full service brokers charge considerably more for each trade, but they also offer investment advice. Many of these guys are brilliant and earn a lot of money for their clients, but you pay accordingly and have no guarantee that their "hot tip" won't go belly-up next week. As a rule, a small-time beginner eager to learn is best off with a cheap online discount broker where trial-and-error is simple and won't hurt very much. A well-heeled investor with a busy schedule may be better off handing the money over to a broker and make it her problem to make the pile grow.

Finally, a word about fees. Whenever you invest, the house always takes their cut whether you're up 20% or down 20%. Over the years, that half-percent makes a big difference. Whether you're shopping for a fund or a broker, compare the fees with others. Do your homework, watch the fees and keep your cool when the market doesn't, and you're off to a great start in stock investing. Good luck!

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Which Bond are Right for you?

Most people know about the basics of investing in the stock market but many people are puzzled as to what bonds are. In one word, a bond is a loan. The loans can be from the federal government, a federal agency, municipality, or corporation. When you purchase bonds you are lending your money to whomever you buy the bonds from. In return for lending them your money you are paid a fixed rate of interest over a set period of time. When the bond matures the investor’s money is usually returned with the earned interest included.

Bonds: The Unbeaten Path to Secure Investment Growth by Hildy Richelson, Stan Richelson An expanded and updated version of "The Money-Making Guide to Bonds", is designed to educate novice and sophisticated investors alike and serve as a tool for financial advisers as well. It explains why bonds can be the right choice and how to use them to achieve financial goals. It presents a broad spectrum of bond-investment options, describes how to purchase bonds at the best price, and, most important, shows how to make money with bonds.

Bonds are like stocks because they are both traded. Therefore you can buy the bonds after they are originally issued while at the same time you can sell bonds before they mature. Bond prices are subject to volatility in relation to market conditions.

When a person is issued a bond they are basically promised to get their money back. Bondholders are paid before anyone else, even stockholders and creditors, if the company runs into hard times or goes bankrupt. Bonds give you a stream of income based on their rate of return. Bonds are usually much less volatile then stocks are. Bonds also can provide a tax break because municipal and government bonds are sometimes exempt from state and federal taxes.

When a bond is issued, the issuer is essentially promising to return your investment, the face value of the loan. The main disadvantage to bonds is that they generally have lower returns than stocks and mutual funds. Bonds are like stocks because their prices are sensitive to interest rates as well. Bonds also carry with them some heavy terminology, which can be confusing and hard to understand.

Type of Bonds:

Government Bonds – The U.S. Department of Treasury and other federal agencies issue treasuries and federal agency bonds. Treasuries are basically risk free because the U.S. government backs them. They are issued to help finance all of the costs involved in operating the government. Municipal Bonds – State and local governments to help pay for schools, streets, highways, hospitals, bridges, airports, and other public works issue municipal bonds. You usually don’t have to pay federal taxes on the interest earned from municipal bonds.

Corporate Bonds – Corporate bonds are issued by businesses to help pay for business expenses. There are a ton of different corporate bonds available all with their own interest rates, maturities, and credit ratings. Corporate bonds are generally higher risk bonds in comparison to municipal and government bonds. They also have a higher rate of return than municipal and government bonds. However you do have to pay taxes on the interest earned from corporate bonds.

Municipal bonds are issued by more than 50,000 state and local governments and their agencies to fund projects such as schools, streets, highways, hospitals, bridges, and airports.

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