- The Dow: which is short for the
Dow Jones Industrial Average and is America’s oldest index
of US stock. Initially set up as a daily average of the stocks
that go to make up its basket (index), today the Dow is a more
complex computerized calculation of the average of its indexed
listed representative stock. Although often seen as being the
barometer of market sentiment on any given trading day, in fact
the Dow represents less than ¼ of US stock – so regardless
of what you hear on the news, it can hardly be called representative!
- S&P 500: S&P standards
for the famous rating agency Standard & Poor and among professionals
is seen as being the most representative index of US stock markets.
As the name suggests, the S&P 500 index is representative
of the most widely traded 500 US stock. Unlike the Dow, it is
also repetitive of approximately ¾ of US Stock –
so far more representative.
- Nasdaq Stock Market Composite:
this index is composed of all stock listed on the NASDAQ. However,
even though the NASDAQ has over 5,000 listed stocks, most are
in the technology sector. As such, the Nasdaq stock market composite
is often seen as being a good indicator of how US technology stocks
are doing, rather than US stocks as a whole.
The Risk
Risk associated with investing in the US stock markets can be
summarized as:
- corporate risk
- economic risk
- market value risk
Corporate Risk
Corporate risk associated with investing in stock is obviously
that the corporation does not perform as well as you had hoped
it would. As a result, the corporation may not announce a dividend
payment, or the general listed stock may not been seen to have
the intrinsic value at which you bought the stock.
Economic Risk
Closely related, but independent of corporate risk is that the
economy is weak and underperforming. If the economy turns down,
consumer confidence falls, unemployment goes up, the housing market
stagnates, then all of these will have an effect on the stock
market and directly or indirectly on the value of your chosen
stock.
Market Value Risk
Of all the risk factors that you need to determine before you
can decide whether or not to invest in any given stock, by far
the hardest to determine will be market value risk. In short,
market value risk is where, regardless of any underlying economic
conditions and the performance of your chosen stock, the stock
market simply ignores your stock in favor of other stock it sees
as being “hotter” then yours. Periodically, a perfect
example of market value risk can be seen with pharmaceutical stock
– especially when there are whispers of a new drug to cure
the latest illness ailing mankind!
Risk and the Indexes
The relationship between risk and the indexes can be seen in the
way that the indexes represent current trends and changes in investment
patterns. By reading the indexes, you should be able to minimize
the hardest of risk factors to determine – the market value
risk. That said, you should always remember that indexes are not
reflective of the market as a whole, whereas market value risk
is normally associated with new and innovative stock – which
may not even be represented in the index! So do use indexes as
an indicator, but try not to use them as an investment decider.
The Long-term Investor
In the end, more often than not, the biggest winner when it comes
to investing in the stock market is the investor who looks to
keep his investment over a long-term period. As a general rule
of thumb: the shorter time you hold the stock, the greater the
risk you have of losing money
