Stocks and Bonds

Introduction


Introduction

A financial market is where buyers and sellers come together to transfer financial instruments—stocks, bonds, and other pieces of paper with some underlying value. These pieces of paper are also known as securities.

The Federal Reserve sells Treasury Bills, Notes and Bonds. Municipalities sell their own bonds, which have special tax advantages. Corporations sell bonds to finance new projects. These are all different markets. And there are similar markets, for every kind of stock or bond, all over the world.

But in the U.S., when people ask about "the market" they are talking about the U.S. stock market, the largest and most complicated financial market in the world.

Mentioned in the same breath with the words "stock market" are usually a couple of numbers. One number that is always mentioned is the Dow Jones Industrial Average (the Dow for short). The Dow is computed by adding together the stock prices of 30 major industrial companies and adjusting for stock splits over the years. (When the price of a stock gets high, it may split, usually in half, leaving investors neutral—with twice as many shares at half the price. The idea is that more people can afford to buy stock if the price of a single share is kept lower.)

People watch the Dow because it shows relative performance, how things have gone up and down over the years. It is an index of how the market is doing.

Another important U.S. index that is mentioned as part of the daily financial news wrap-up along with the Dow Jones Industrial Average is the NASDAQ Composite Index. This index measures all NASDAQ domestic and non-U.S. based common stocks listed on the NASDAQ. This index comprises over 5,000 companies and has a strong representation of technology-oriented companies.

The Standard & Poor's 500 Composite Stock Prices Index ("S&P 500") covers 500 of the largest stocks in the country. There are many other indices. The Russell 2000 Index has the smallest two-thirds of the 3,000 largest U.S. companies. Many of the hot new stocks of the past decade are in it. The Wilshire 5000 Index includes all stocks traded on exchanges and over-the-counter (not on an exchange). It is the broadest measure of how stocks are performing.

When you're ready to invest, you may be considering both stocks, which are pieces of ownership in a company, and bonds, which are loans you make to a company, a government agency, the federal government, or a municipality. There are advantages and disadvantages to each form of investment. You may also consider guaranteed investment contracts—GICs—which are usually issued by insurance companies and are similar to certificates of deposit, but are not insured (as CDs are).

You cannot invest directly in any index. Past performance is not guaranteed. Individual results will vary.


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