Understanding The Condition of the Stock Market

A key part of productive investing is understanding the health of the stock market. To do that, you need to speak the language. This article introduces you to the most common terms.

Bull and Bear are the two most popular and longstanding ways to describe the general trend of the stock market over a specific period of time. These terms can refer to the overall stock market or a specific part (usually called sectors) like tech or oil.

Bull Markets:

• A Bull market means the stock market is growing in value.
• It is seen as positive and healthy.
• It can last for several years.
• It is the most common type of market because the market generally grows over time.
• Wall Street has a large iron statue of a bull representing the goal of market growth.

Bear Markets:

• A Bear market means the stock market is dropping in value.
• It is seen as a cause of concern.
• It is less frequent, lasting a few months to a few years.
• Officially, the term describes a market that has lost 20% of its value in a short period of time.
• There are no bear statues on Wall Street.

While it’s unknown why bear and bull were specifically chosen, these terms have described stock markets since the 18th Century.

Volatility is another important indicator for the stock market and individual stocks. Essentially, it’s a way to measure sudden price changes. A highly volatile stock is one that rapidly and drastically increases and decreases in price. This makes a stock more risky, as you aren’t sure how it will perform at any given time, and changes can be drastic and unpredictable. The overall market itself can also be considered a volatile market if drastic changes happen to many stocks at once. In general, this is more likely to happen in a bear market.

Indexes (or index funds) are a collection of companies grouped together and tracked to make assumptions about the stock market as a whole. If a popular index is doing poorly, it could be a sign of a poor economy. Indexes often use the largest and best performing companies to evaluate the stock market.

The most popular indexes are:

The S&P 500 (Standards and Poor 500): The S&P 500 takes the 500 highest performing stocks to create its index. The larger the stock, the more influence or weight it has. This is one of the most carefully watched indexes to understand and predict the overall market health.

The Dow (Dow Jones Industrial Average): This is an index of 30 prominent companies selected by a committee of three representatives from the S&P and two from The Wall Street Journal. Because it only examines 30 companies, it tends to be a less reliable measure of overall market performance, but can be better at predicting how individual portfolios are doing if they line up with the 30 companies The Dow specifically examines.

The NASDAQ (National Association of Securities Dealers Automated Quotations): The NASDAQ consists of more than 3,300 different companies and is heavily weighted toward information technology. It has seen rapid growth over the past 40 years, becoming a major representative of market growth.

Understanding these terms puts you well on your way to absorbing stock market and economic news with ease. And when you understand what's happening to the market—downward trends, successful companies, well-performing indexes—you can make more informed investments and participate in the economy with more confidence.