Behind the Scenes Interview with the First Family of the American Stock Market
Most of you have heard of the stock market. In fact, many of you participate in trading stocks either actively, or passively through your retirement plan like a 401(k), 403(b) or an IRA. But how much do you really know about the history of the stock market, what companies comprise the market, and other key details about an industry that has been around for more than 124 years?
Since the markets were recently at an all-time high, we thought it was a great time to sit down with 3 members of the First Family of the Stock Market to learn more about them. Ignite My Money was lucky enough to interview these icons to find out what they’ve been up to, and what they have planned for the future. We hope you enjoy some excerpts from our conversation.
First we spoke with the patriarch of the major indices, Dow Jones Industrial Average, but he insisted we call him Dow for short. Born in 1896, Dow is a price-weighted index that tracks the stocks of 30 of the largest companies that are traded on a daily basis. When we asked him to confirm that number, he stated that was correct. The entire Dow is only based on the movement of 30 stocks, of the thousands of publicly traded companies. Now they are names you recognize like American Express, Coca-Cola, Apple, Boeing, McDonald’s, Wal-Mart, and Disney to name a few. The veteran of the group is Proctor & Gamble who was added in 1932, and the newest were recently added in 2020, Salesforce, Amgen and Honeywell. The Dow is an “invitation only” party, as companies are added and subtracted by the index, but the number always stays at 30.
We asked Dow how his index works exactly. He replied that because he is a price-weighted index, the companies with a higher stock price are more heavily weighted in the calculation of the index as a whole. The Dow is basically a weighted average of all 30 stocks in that index. A rise in the index means that as a whole, those 30 stocks are performing better than they did yesterday. A decrease means the opposite.
Here is the impressive bio for our friend Dow:
Born: 1896 (and still going strong)
All-Time High: 29,551.42 (Feb. 12, 2020)
All-Time Low: 28.48 (Aug. 8, 1896)
Number of Stocks: 30
While Dow gets the majority of the publicity because of his age and Blue Chip companies, he fully admits that he really only represents a snapshot of the market. He claims that his wife is a much better representation of the stock market as a whole. So with his urging, we spoke to her next!
Meet S&P 500. Her full name is the Standard & Poor’s 500 and she was born in 1957. Unlike her husband, S&P has a far more diverse amount of stocks (500) and industries within her index. S&P tracks the stocks of 500 of the largest U.S. companies. The companies that make up the S&P 500 are selected by a committee based on their size, industry, and liquidity. The index is re-balanced every quarter in March, June, September, and December. S&P was quick to point out that not just any company can qualify for her index. They must meet the following criteria just to be considered:
· Company must be in the United States
· Have a market cap of at least $8.2 Billion
· 50% of company stock must be available to the public
· Stock price must be at least $1 per share
· Minimum of 50% of fixed assets and revenue must come from U.S.
· Must have 4 consecutive quarters of positive earnings
Some of S&P’s top 10 companies are a who’s who of American success. Amazon, Google, Berkshire Hathaway, Johnson & Johnson, Facebook, and Visa to name a few. The price of the S&P index is calculated by using a cap-weighted formula that gives more weight to larger companies. While the S&P is not as widely known as the Dow, it is often regarded as the truer representation of the entire stock market, and is therefore used by many investors to measure the health of the overall US stock market and economy.
Here is the bio for S&P 500:
All-Time High: 3,580.44 (Sept. 2, 2020)
All-Time Low: 40.33 (Dec. 1957)
Number of Stocks: 505 (yes, there are actually 505)
After learning about S&P’s history and milestones, she invited us to speak with her son. “You’ll love him, he’s really into technology”, she said. On to our third interview!
We were introduced to Nasdaq 100, who was named after the exchange where his stocks are traded. The National Association of Securities Dealers Automated Quotations (NASDAQ), decided in 1985 to track the 100 largest non-financial stocks trading on its exchange. And Nasdaq 100 was born! The youngest of all the indices, Nasdaq is like many millennials, he LOVES technology! In fact, technology accounts for 54% of the index’s weight. Companies such as Apple, Amazon, Microsoft, Tesla, Nvidia, Zoom, PayPal, and Netflix are top performers within the index.
While the majority of the Nasdaq 100 is technology, it also includes industries like service, healthcare, and consumer goods. Because it is heavily weighted with technology companies, the Nasdaq is often the most volatile of the three indices. While it tries to portray diversity by adding other industries, the top 6 companies of the Nasdaq 100 make up 50% of the index’s weighting. That means the Nasdaq 100 lives and dies by how Apple, Amazon, Microsoft, Facebook, Google, and Telsa perform.
Here is Nasdaq 100’s bio:
All-Time High: 12,056.44 (Sept. 2, 2020)
All-Time Low: 106.77 (Sept. 1985)
Number of Stocks: 103 (yep, there can be up to 103)
While we learned that each index has its own aspects that make it unique, we also learned that there are several similarities among them too. For instance, all the indices go through time periods called bull markets, bear markets, and corrections. A Bull Market means that stock prices are rising, and expected to continue to rise. A bull market officially begins when an index increases 20%, then continues to accelerate. The opposite of that is a Bear Market. That occurs when stock prices fall, and are expected to continue to fall. A bear market officially begins when an index falls by 20%, then continues to decline. A correction is far less volatile, and occurs when an index falls by 10%.
Bull and Bear markets typically occur every 5 years or so, while market corrections take place about every 2 years on average. Corrections can be good for the market and are often viewed as a buying opportunity.
Fun Fact: Some people believe the terms "bear" and "bull" may have originated from the way each animal attacks. A bull will thrust its horns up into the air, while a bear will swipe down. These actions were then related to the movement of a market. If the trend was up, it was considered a bull market. If the trend was down, it was a bear market. Bulls and Bears are also both considered strong and unpredictable animals, just like the stock market!
So what do the markets have in store moving forward? That is the question everyone wants to know. While no one is a mind reader, we do know that markets are very cyclical. They have ups and they have downs. We do know that 2 of the 3 indices recently hit all-time highs earlier this month (and the 3rd was only 1% away from making it a clean sweep). So what comes next? A continued Bull market, or does it turn toward the Bears? Only time will tell. Whatever the case, and however you decide to play the market, please be smart. Remember the old Wall Street saying….
Bulls make money, Bears make money, Pigs get slaughtered. Don’t be a Pig!