Before deciding where to invest lets look at some basic facts about the stock market indices as they are a key part of learn trading and investing course.
Below is a chart for the Dow Jones Industrial Average from May 2010 to March 2015. The Dow Jones is the most recognised index in the world and it consists of 30 top American companies, such as Disney, Boeing and American Express.
An index number is one figure which represents the average price of all the 30 companies. The index may go up, down or move sideways – it is constantly fluctuating as buyers and sellers move in and out of the market. But over a long enough period of time you will be able to see a pattern emerging i.e. that the market is trending either up or down.
Looking at the chart below from left to right would you say the trend is up or down.?
But as you can see from the chart there are times when the market moves sideways and it may do nothing for months. There are times when the market drops rapidly like the great financial crisis of 2008. As traders we try to make money whatever the direction of the market up, down or sideways.
UK Stock Market Indices
The chart below is the price chart of the FTSE 100 Index. As the name suggests, it is an Index of UK stock market, called Financial Times Stock Exchange or Footsie for short. 100 companies make up this index including the major banks such as RBS and Barclays.
As investors we should ask ourselves – is the index likely to fall to zero so that our investment would be wiped out? This is very unlikely as it would mean all 100 companies would have gone to zero. Huge drug companies like Astrazeneca and world wide defense companies like BAe systems all going to zero – very unlikely.
Therefore stock market indices like the Dow and the FTSE can be good candidates for us to invest in.
The fluctuations in the price of the index gives us opportunities to invest. We should be aiming to buy the index when it moves to a low and be exiting when it moves to a high.
What is a stock exchange?
Below is a short video explaining what exactly are the London, Tokyo and New York stock exchanges. It explains the links between the seller, his broker, the stock exchange, the buyer and her broker.
Although most of you will have heard of the Dow Jones the major index in the USA, and for that matter the world is Standard and Poor’s 500 (SP500). This is made up of 500 companies and therefore gives us a more broad indication of what is happening in the stock market. It does fluctuate more but by doing so it gives more points at which to enter the market.
Another stock market indices which is popular with investors the Nasdaq 100. This is made up of US technology giants including Facebook and Apple.
Stock market indices are great for investing in because they are made up of many companies and therefore the chance of them all falling to zero are not great.
We can purchase all the above through something called an ETF. An ETF is an ExchangeTraded Fund, which is simply a basket of shares already made up for you. You don’t have to buy into a managed fund and pay lots of management fees, you just buy the ETF off the shelf, already filled with companies.
How about investing in commodities – such as gold or silver?
Take a look at the chart of gold below. Note how much it has fallen and how volatile and spikey it is.
It is not uncommon for Gold to fall by more than 3% in one day before bouncing back.
Usually whenever gold falls, silver falls more and whenever gold rises, silver rises more!
In the next lesson we shall look at investing in stocks and shares.