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How Stocks and the Stock Market Work


Stock Averages and Brokers
A trader at the Chicago Board of Trade watches as the Dow Jones Industrial Average, S&P 500 and NASDAQ Composite Index all fall upon news of soaring gas prices in July 2008.
A trader at the Chicago Board of Trade watches as the Dow Jones Industrial Average, S&P 500 and NASDAQ Composite Index all fall upon news of soaring gas prices in July 2008.
Scott Olson/Getty Images

What are those mysterious numbers called the Dow Jones Industrial Average, the S&P 500 and the NASDAQ Composite Index that are always reported on the evening news? These aren't individual stock prices, but broad market averages designed to give you a general idea of how companies traded on the stock market are doing. The Dow Jones Industrial Average is the sum of the value of 30 large American stocks -- think General Motors, Goodyear or Exxon-Mobil --divided by the number of companies plus any stock splits. The S&P 500 is the average value of 500 of these large companies. The NASDAQ Composite is the average of all stocks listed on the NASDAQ exchange (more than 2,800) and includes both domestic and global companies.

What these averages tell you is the general health of stock prices as a whole. If the economy is doing well, then the prices of stocks tend to rise en masse in what is known as a bull market. If it's doing poorly, prices as a group tend to fall in what is called a bear market. A bear market is generally defined as a sustained decline of more than 20 percent of the Dow Jones Industrial Average [source: CNN Money].

As an investor, you have several options for buying or selling stock. There are dozens of companies that are authorized to trade with the major U.S. stock exchanges and even foreign exchanges like the Tokyo or London Stock Exchanges. If you call an investment house like Merrill Lynch, Charles Schwab or Morgan Stanley, they'll connect you to a stockbroker who can make your trades for a fee.

As with many other industries, the Internet has revolutionized stock trading, giving anyone with an online trading account the power to execute their own stock purchases and sales for as low as $7 a trade.

Stocks that aren't listed on an exchange are sold Over the Counter (OTC). OTC stocks are generally in smaller, riskier companies. Usually, an OTC stock is stock in a company that doesn't meet the requirements of an exchange.

For lots more information on stock, the stock market and related topics, see the links on the next page.


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