Stock Market

Many of the companies that you buy products from also sell pieces of their companies to investors. With new technology, average Americans invest money hoping to make a profit. The U.S. Stock Market is one of the most visible signs of the economic health of the nation. Over time the stock market has seen massive price changes with long boom cycles as well as periods of correction and even crashes. In this summary, we examine the basics of the market that shows up on smartphone apps, tv screens, and daily newspapers.

• What is the stock market?
• What is the Dow Jones?
• What do stock market corrections and crashes look like?
• Key takeaways

Stock Market Definition

The stock market refers to an exchange where shares of corporations are bought and sold.

These shares, known as stock, are pieces of companies that are traded by both professionals and amateur investors both in-person and online. Stocks range in quantity up to millions of shares with prices from fractions of a penny to hundreds of thousands per share.

Stock Exchanges and Markets

In addition to stocks, investment bonds and mutual funds (groups of stocks) are other financial instruments that are bought and sold by public companies. Electronic exchanges have grown in popularity although central trading centers in places like New York (New York Stock Exchange) and Chicago (Chicago Stock Exchange) still operate with some traditional, in-person raucous processes.

Wall Street is an actual street in Manhattan where the New York Stock Exchange resides, but is also a catch-all phrase to refer to big investment firms.

Investment firms, like the corporations they invest in, can be both public and private. Privately-held companies hold their own stock with the general public unable to invest.

Fig. 1 Bull Market v. Bear Market, Pixabay.

It can be hard to decide when a bull or bear market begins. Many financial professionals use the following metric:

↔ a period when stock prices rise by 20%, after a drop of 20%. This is typically followed by a second 20% decline in stock values.

The Dow Jones and the Stock Market

The Dow Jones Industrial Average, also known as the "D.J.I.A.", "Dow Jones", or "Dow", is an index of 30 big corporations in America. These companies are changed throughout history as the size of the company and importance shifts. The original 12 companies that made up this list in 1896 are all gone (General Electric, still in operation, was removed from the list in 2018) and were big industrial corporations.

How many of the current Dow companies do you recognize?

Currently, the Dow Jones Industrial Average, which uses a weighted average of 30 currently influential corporations, includes:

Dow Jones Industrial Average Index 2022, StudySmarter Original.

Fig. 2 New York Stock Exchange

Stock Market Graph

The Dow Jones is the most often mentioned and publicly followed indices of the stock market. The other two major indices are the Nasdaq Composite and the S&P 500. The Nasdaq measures 500 primarily technology companies while the S&P measures the 500 largest companies that are publicly traded.

Historically, stock prices have risen over time with noticeable periods of decline as well as spans of intense growth. Using the following graph, note the Stock Market Crashes of 1929 and 2008.

Dow Jones Industrial Average from December 1789 to March 2016 (monthly closings). Delphi234, Wikimedia Commons

Stock Market Corrections

Over time, significant stock market drops have impacted financial markets and cost investors lots of money. A correction in the stock market refers to a drop of 10% in the value of any stock market index like the D.J.I.A. Once stocks go up by 10% or at least reach a price higher than before the correction - a recovery is charted.

Some investors and analysts look at corrections as predictors of an impending bear market. Since the fall of 1974, there have been 25 market corrections and bear markets occurred after the following market corrections:

1. 1980
2. 1987
3. 2000
4. 2007
5. 2020

Market corrections are obviously distressing to both short and long-term investors who typically fear a bear market. The most concerning scenario is known as a market crash.

Stock Market Crash

A stock market crash is a sudden drop of more than 10% over a short number of trading days. A crash is typically unexpected and involves panicked selling of stocks, resulting in plummeting prices.

Notable Stock Market Crashes

• 1907 - The Panic of 1907 was an October drop of 50% on the New York Stock exchange.

• 1929 - Black Tuesday and the Stock Market Crash of 1929 contained a cumulative drop of 40% over a month. On Black Monday (October 28, 1929) and Black Tuesday (October 29, 1929) the Dow Jones plunged 23% in just two days.

• 1987 - Black Monday (Oct. 19, 1987), marked the largest one-day stock market decline in U.S. history. On that one day the Dow dropped 23%, the S&P 500 dropped 20% and the Nasdaq dropped 11% (saved by an early system failure).

• 2008 - Housing/financial crisis of 2008 in October 2008. Over five days the Dow dropped 18% and the S&P lost 20% with record-setting selloff volume.

• 2020- February and March Coronavirus-related selling caused a major double-digit selloff in the stock market.

During the Great Depression that began after the 1929 Stock Market Crash, the SEC (the Securities and Exchange Commission), was created to police the stock market. Formed in 1934 to prevent future economic casualty, the SEC regulated the markets and sets limits on trading, accounting, and reporting of prices, earnings, etc.