I am perfectly willing to admit ignorance on a subject that is ALWAYS in the news. When they say the DOW is at 10,500 (for example), what is the significance of this number? Does the same hold true for NASDAQ? And, while we’re at it, is it better to buy no-load or load funds? Why?
A ship in the harbor is safe, but that isn’t what a ship is built for.
The Dow Jones Industrials was originally what is sounds like: they took 20 stocks and added their stock prices together. Over the years, the number has been increased to 30. In addition, they also calculated a divisor to take into account stock splits, changes in prices when a company was added or dropped, etc. Last I looked, it was about 0.33
Thus if the Dow is 10,000, it means that the sum of the stock prices of those stocks, divided by the 0.33 (or whatever) equals 10,000. Because the divisor is so small, a single point increase in one stock increases the Dow considerably more. Most Wall Street insiders don’t consider the Dow a good measure for this reason and use something like the S&P 500. But the Dow has gotten all the publicity and does form a continuous benchmark for over 100 years.
The NASDAQ is similar, but includes many more stocks.
All things being equal, no-load fund are preferable because you’re not paying the extra fees. A load fund has to outperform an no-load fund to bring you the same returns.
Read “Sundials” in the new issue of Aboriginal Science Fiction.
www.sff.net/people/rothman
If you’re going to hold a fund for a long time it pays to look at the expense ratio too. The fund people will find a way to get paid.
{{All things being equal, no-load fund are preferable because you’re not paying the extra fees. A load fund has to outperform an no-load fund to bring you the same returns.}}RC
–Reality is right on this…but let’s add a caveat. We’re assuming you’re holding both funds the same length of time and both perform identically. Some people need their hands held to hold on to a good fund. That’s what a good broker does for you. OTOH there are a lot of bad brokers out there who are sharks.
If you’re on AOL you might want to visit the Sage sites and enroll in their free Mutual Fund School. Online you might visit bobbrinker.com for starters. Vanguard has a good site with school. Take your time.
The Dow has an interesting history, being first compiled in 1896, and intended to represent a cross-section of American Industry. It was originally comprised of 12 stocks: American Cotton Oil,American Sugar,
American Tobacco,Chicago Gas,Distilling & Cattle Feeding,General Electric, Laclede Gas
National Lead, North American, Tennesee Coal & Iron, U.S. Leather preferred, and U.S. Rubber.
Over the years stocks have been added, changed, dropped, etc. Most recently, last month the DJIA dropped Sears, Goodyear, Chevron and Union Carbide for Microsoft, Home Depot, Intel, and SBC Communucations, reflecting a changing economy. And Microsoft and Intel are the first non-NYSE components to be included in the DJIA since its inception.
Over long periods, the DJIA and the S&P 500, along with some other indexes, actually run fairly close together; but for day-to-day trading, the Dow can be pretty volatile.
“Come on, Phonics Monkey–drum!”
IIRC, from my years working for an investment firm, the DJIA is an unweighted index; that is, as RealityChuck says, it is computed by adding the prices of its components together and then applying a divisor that accounts for splits, index changes, etc.
The S&P 500, OTOH, is a cap(italization)-weighted index. The prices of its components are first multiplied by the fraction of the total value (capitalization) of the index that they represent, then added together, then a divisor is applied to account for index changes. This is thought by most to be more accurate (although certainly not perfect), on the theory that a $1 change in a $10 billion stock is more significant that a $1 change in a $1 billion stock.
I don’t know whether the NASDAQ is weighted, or how.
“Kings die, and leave their crowns to their sons. Shmuel HaKatan took all the treasures in the world, and went away.”
The NASDAQ Composite Index (the one most frequently quoted) is also capitalization-weighted.
It’s also worth mentioning that until recently, a normal investor could not go to her/his stockbroker and “buy the Dow.” There now exist Diamonds and Spyders, which are unit investment trusts which track the Dow and the S&P, respectively.
Livin’ on Tums, Vitamin E and Rogaine
Easy. When the number is higher, people make money & when its lower people lose money.
I hear Danskin is a good buy right now. (snicker)
Thank you all for the enlightenment on this subject. Oh, and, Nickrz, we appreciate your pushing your favorite brand of “tights”, but I don’t think you’re quite ready to be our financial advisor…(DANSKIN! REALLY!!!)
Regarding the no-load/ load funds. Though I am by no means a finance expert, when I was getting my MBA, I seem to recall our finance teacher (who is now dean of the school and considered one of the top in his field) telling us that no-load and loaded funds perform almost exactly the same over time when you factor in the load. (i.e. the loaded fund does better by roughly the amount of extra cost you pay).
I personally invest quite a bit of my money in Fidelity, and having both kinds of funds, and this seems to be correct.
[sheepishness]
That Danskin joke went so far over my head that the FAA fined it. Is it a reference to the crappy penny stock, a pun, or what?
Livin’ on Tums, Vitamin E and Rogaine
It’s a pun. Nickrz = knickers = tights = Danskins…I guess.
The notion of a ‘market index’ became popular in 19th century, because many investors wanted to a consistent way of telling whether a particular stock outperformed or underperformed the market as whole. I.e., if you own a stock that appreciated 10%, it’s good if “the market” is up 3% and not so good is “the market” is up 45%.)
The Dow Jones Industrial Average was the first popular index. Since there were no computers (or good calculators) back then, they chose a sample of large companies that was small enough so even a human could manually compute the average price. A problem with a small sample like DJIA is that it doesn’t tell you when something happens to a company not in a sample (e.g., Microsoft wasn’t part of DJIA until recently), but may be overly influenced by a specific event (e.g., IBM having trouble but not “the market” in general).
For this reason, most “serious” investors usually look at the much broader Standard & Poors 500 index instead of DJIA to measure the performance of large U.S. stocks “as a whole”. Some prefer the Russel 2000 or Russel 5000 indices (even broader). S&P has other size-based indices (like S&P 600 for mid-size companies).
There are many other stock indices to measure particular segments of the stock market. The Dow Jones Transportation index is probably obsolete, but people like to compare individual stocks to their industry indices. In particular, some people view Nasdaq indices as a kind of a measure of high tech / internet stocks.
There are traditional indices for most other countries with stock markets (like Toronto Stock Exchange 300 for Canada); and newer ones form companies like Goldman Sachs / Finantial Times Actuaries and Morgan Stanley Capital International. They’re generally not very different.
I hope this helps.
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In addition, they also calculated a divisor to take into account stock splits, changes in prices when a company was added or dropped, etc. Last I looked, it was about 0.33
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I happened to look up this number this morning for another thread. The divisor after the most recent additions to the Industrial Average, is .20435952, which means that a one-point move in any Dow stock moves the average about 5 points.
Livin’ on Tums, Vitamin E and Rogaine