The Stock Market Made Simple

in Stock-market

You're driving to work in the morning with the radio on and hear the following. "Bears took control yesterday and sent the stock market down 200 points on fears of today's Fed decision. Some analysts feel stocks were over-bought and due for a correction." You roll your eyes and look for some music. What language are they speaking?

Here's a real simple investor guide that translates the above in very basic terms. Wall Street has its own language. If you want to learn to invest, it's good to start by learning some of the language. Keep your perspective. This investor guide is written for the clueless who want to learn to invest.

The Bears are a football team in Chicago. Wall Street also has bears. These bears are negative on the future direction of stock prices, and they bet that stocks will fall. This they do by selling their stocks, or they sell short. When you sell short you bet that a stock, or stocks in general, will go down in value. This is legal, and has been going on for many years. When investors on balance are placing sell orders or orders to sell short vs. buy orders, the stock market goes down.

"The stock market was down 200 points" means that the Dow Jones Industrial Average (DJIA or just DOW) fell 200 points. The DOW is the most popular of the market indicators or indexes. Basically, it tells investors how stocks in general performed. If the Dow fell from 10,000 to 9800, for example, it was down 200 points, for a loss of 2%. In other words, if you owned stocks yesterday, you probably just lost about 2% of your investment.

The "Fed" refers to The Federal Reserve, which oversees our banking system and sets policy on interest rates. In this case investors were, on balance, afraid that the Fed would not move to lower interest rates in the economy. Stock investors try to anticipate the future, and generally favor lower interest rates. They don't like fear and uncertainty, and react by selling stocks, which sends the stock market down.

Analysts are experts who express their opinions. They refer to stocks as "over-bought" when they feel that the stock market is higher than it should be. This implies that if you are a smart investor that you should sell before everyone else does, in their humble opinion.

"Due for a correction" means that stocks go up and stocks go down, and sometimes they go too far in one direction. In this case some analysts feel that the market has been on a roll too long, and sooner or later stock prices will fall, since stock prices always fluctuate.

Investor guide tip #1: If you want to learn to invest in the stock market, start by learning the language. Then you can interpret the financial news, and anticipate how other investors will react to it.

Investor guide tip #2: Realize that other investors will react to the news if they feel it will affect the stock market. In this case they sold stocks and sent stock prices down.

Investor guide tip #3: As you learn to invest and play the stock market game, try to seperate what's truly important from hype. Some news has long-term effects on stock prices. Hype is a temporary distraction of little long term significance.

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James Leitz has 1 articles online

A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.

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The Stock Market Made Simple

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This article was published on 2010/04/03