Explain It to Me

Q&A about the Market

This section is for those questions that a lot of people have, for example “why is X bad for the economy”. I will try my fullest to research and answer those questions.

What is the Federal Reserve $85 Billion stimulus that the Fed is pumping into the economy, and why is it affecting the market?

  • The $85 Billion stimulus that the Federal Reserve is pumping into the economy is called Quantitative easing. The idea is to increase the supply of money in the economy. If people have more money, they’re more likely spend money, which is good for economic growth.
  • The problem with this is INFLATION. Since there’s more money in the economy people will spend more money, which triggers businesses to raise prices since consumers are spending MORE. 
  • The pro side of Quantitative easing is that it helps Banks, financial institutions because it lowers their interest rates which is done by buying the banks debt. In theory QE will give more money to consumers/investors/businesses to borrow through the process of borrowing and loans to stimulate the economy.
  • How does it help the stock market? Quantitative Easing (QE) brings optimism and confidence into the market thus giving it that extra push so investors invest more. In conclusion there is still some debate on how effective this monetary policy is.

What is NASDAQ, DOW JONES, and S&P 500 and whats the difference between them? Also whats the difference between NASDAQ and NYSE?

  • Lets start with DOW JONES, DOW JONES or (DJIA) is a index in the stock market, and these indexes in the stock market is created to see how each part of the stock market is doing. DOW JONES consist of the 30 LARGEST companies in the United States. The Dow Jones is one of the most closely watched stock market index because it does a good job of showing the general health of the stock market. Click on this link to see the 30 companies in the DOW JONES.
  • S&P 500 is 500 companies under the NYSE (New York Stock Exchange). The S&P 500 is one of the most commonly used benchmarks for the overall U.S. stock market. Click on this link to see the 500 companies in the S&P 500.
  • NASDAQ is another exchange like the NYSE (New York Stock Exchange) where people can buy and sell stocks. The difference between NASDAQ and NYSE is that, NASDAQ is purely electronic system for trading while the NYSE is a physical place where traders trade stocks. Another difference between them is NASDAQ is newer and cheaper to get listed. Stocks there tend to be newer, high tech or smaller, more volatile companies. Think Apple, ebay, netflix, Vodafone, Staples. NYSE is much older and much more expensive to get listed. NYSE listed companies are bigger, older and better established, or they really want to give that impression. Think Ford, GE, IBM, Bank of America etc.

So in conclusion NYSE and NASDAQ are the two stock exchanges where you can buy and sell stocks. Then indexes come in which are groups that fall under either NYSE or NASDAQ, heres a demonstration:

NYSE

  • DOW JONES
  • S&P 500

NASDAQ

  • NASDAQ 100
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3 replies

  1. I like the idea of this.

  2. I have a question. What are the units of measure when saying the stock market? Like when someone says , ” The Dow Jones is at 15,193″, what do they mean? Thanks!

    • Hello Paul from what i can tell you is that the unit of measurement is “Market Weight” and need to understand the concept of “Market capitalization”. Each company or stock has a different market weight which effects the index. For example lets say Apple (AAPL) has 20 Shares and its price in the index is $4.00 then what you do is (20 X 4.00) = 100. The 100 is the market capitalization which is the total value of the company’s shares all together. Next the “Market Weight” needs to be calculated so it can be measured into Dow Jones. To find the market weight we take the market capitalization, in our case 100 and divide it by the Dow Jones total market capitalization of the index. So lets say the total market capitalization of Dow Jones is 287, so what we do is (100/287) and we get 34.84%. The larger the market weight of a company, the more impact each 1% change will have on the index. So if APPLE were to rise 3% while all other companies remained unchanged, Dow Jones would increase in value by 1.04% because (34.84 X 0.03). Well i hope i answered your question! Let me know if there’s any misunderstanding, and I apologize for the late reply.

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