Consumers Digest

If I buy a stock of a company, how does the DOW, Nasdaq, and S&P play apart of my investment?

I don't understand what the S&P, DOW, and NASDAQ mean?

Public Comments

1. The stock you buy may be a part of one or more of those averages. They really do not play a part in your investment. The stock you own may go up or down regardless of what the averages do. The Dow Jones Industrial Average is made up of 30 US based stocks. http://money.cnn.com/data/dow30/ The S&P 500 has 500 companies in it. They are also all US based companies. The NASDAQ refers to the NASDAQ market where many technology companies stocks trade.
2. Well you should not be buying sticks until you understand a lot about stocks, stock exchanges, brokers and the company you buy the stock for! Those are averages. They choose a representative cross section of stocks among the 10,000 + companies trading on the stock exchanges in the USA. They say how the market did on any give day. The DOW was the first average for an America stock exchange. Back when it started there were only a few hundred stocks being traded. It tracks the largest more prestigious companies these days. NASDAQ is the average on America's second major stock exchange. It's consider more tech heavy then the DOW and has more stocks in the average because computers were in use when it was created so a larger sample of stock could be use for the daily average. It averages 3000 stocks. The S&P and also the NASDAQ have multiple averages. The S&P average started tracking stock after the DOW and but before the NASDAQ. It started in the 1950s and is weighted. It follows larger cap (bigger companies). There are many more averages including the Russel, which follows smaller companies. The averages were not designed to effect anything, they are meant as a ruff guide to how a segment of the stock market is doing. In the 1980 index mutual funds came a long. The index funds instead picking their own stacks, just bought every stock in a give index. This probably inflated the value of the stocks in those indexes. When a stock was drop from an indexes, it meant the stock would also be sold by the mutual fund meaning being dropped from the index would not only lose prestige but further drop the price of that stock. I think these fund have lost a fair amount of popularity, these days. And would not have a significant effect on a sock you bought even if it is one of the stocks listed in the average. There are a lot of good books on stock valuations and trading stocks you need to read at least four good ones before you start investing. One of them should be: The Intelligent Investor: A Book of Practical Counsel by Benjamin Graham Also read up on Warren Buffet. " Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his. Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market's quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him. Mr. Market has another endearing characteristic: He doesn't mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you. "
3. Sorry Steve and Pam, but you guys miss a huge functionality of stock indices. Steve and Pam are right in that these indices tell you the general performance of the market, with Dow tracking a select number of big blue chips, nasdaq tracking tech-oriented companies, and S&P 500 offering a broader reading by covering more companies. But in addition to telling you merely how the market is doing, indices also provide you a benchmark. If you're gaining +10% every year on your portfolio for the next 5 years from investing, you'd probably think you're doing pretty well. But if the indices all go up 15% every year during that time, then you're lagging the performance of the broad market, and your investment performance basically tells you that you would have been better off buying into a fund that tracks these diversified indices rather than trying to pick stocks yourself (because you suck at stock picking, even though you made money). One strategy employed by some investors is to "start off" with an S&P tracking etf, and then "deviate" from S&P (in an attempt to outperform) by making small purchases here and there in addition to the ETF. This way, an amateur investor can achieve diversification in solid companies, while also having a chance to play their own hand a bit.
4. AIG was be a best stock to invest if you plan to invest for a long term, because AIG is too big to fail and beside AIG no longer need government bailout money. if you invest in AIG are now you returning profit is 10-30 times in 3-5 years.