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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Why many prospective investors shy away from making their own investment decisionsStock Sectors Stock market activity is reported each day by certain indexes, which reflect the general health of the economy. Everyone has seen the Dow Jones Industrial Average (DJIA) mentioned on the nightly news as a key indicator of the days trading performance. But what is the DJIA and how did it get started? In 1884, Charles Dow surveyed the average closing prices of nine railroad stocks and two manufacturing companies, which, in his opinion, represented the general trends in the national economy. He printed the results in his newspaper, a forerunner of todays Wall Street Journal. Over the next 12 years, he honed that list until he finally settled established growth and emerging growth. Established growth stocks have seen several years of successful expansion. In contrast, emerging growth stocks are the up-and-comers that are currently experiencing dramatic expansion, yet have limited previous growth experience. Both offer investors the potential to make dramatic gains or suffer heavy losses depending on market performance. Todays DJIA reflects the performance of 30 major companies representing key manufacturing, technology, energy, financial, and service industries worth approximately 25 percent of the total value of all stocks listed on the New York Stock Exchange. It is widely regarded as an accurate assessment of the daily trends in the American economy. However, many investors believe the DJIA is too narrow with only 30 stocks in the index. The Standard & Poors 500 Index (S&P 500) is followed very widely these days as it represents a more diversified portfolio of 500 different companies. However, if you track the performance of the DJIA to the S&P 500 you will find that they are highly correlated (prices move very similarly). While the Dow Jones Industrial Average and the S&P 500 track the performance of the stock market as a whole, some indexes are used to track sectors. In fact, there is a wide variety of stock sectors from which to choose. The following list is a general outline of the most popular ones. Sector IndexSymbolMS Consumer Products Index$CMRDow Jones Utility Average$DUXPHLX Bank Sector Index$BKXDJ Transportation Average$DTXAMEX Oil Index$XOIPHLX Defense Sector Index$DFXMS Cyclical Index$CYCAMEX Natural Gas Index$XNGAMEX Pharmaceutical Index$DRGMS Commodity-Related Index$CRXMS Retail Store Index$MVRPHLX Box-Maker Index$BMXAMEX Broker/Dealer Index$XBDPHLX Oil Service Index$OSXAMEX Networking Index$NWXPHLX Street.com Internet Index$DOTAMEX Biotechnology Index$BTKMS Oil Service Index$MGOGSTI Computer Software Index$GSOGSTI Computer Hardware Index$GHACBOE Internet Index$INXPHLX Semiconductor Index$SOXPHLX Gold Mining Index$XAUAMEX Airline Index$XALAMEX Disk Drive Index$DDX Instead of using indexes, some traders watch the performance of individual stocks to gauge trends in an industry or sector. Some sectors and gauges follow. For example, Intel (INTC) is often considered a gauge for the semiconductor group. Technology: Computers (e.g., Dell, Hewlett-Packard). Internet-related (e.g., Amazon.com, Yahoo!). Software-related (e.g., Microsoft, Adobe). Semiconductors (e.g. Intel, Applied Materials). Health-related: Pharmaceuticals (e.g., Merck, Pfizer). Biotech (e.g., Amgen, Biogen). Defense industry (e.g., Boeing, Lockheed Martin). Retailers: Clothing (e.g., Gap, Wal-Mart). Sportswear (e.g., Nike, Reebok). Automakers (e.g., General Motors, Ford). Transportation (e.g., Delta Air Lines, Continental). Financial services (e.g., Citigroup, J. P. Morgan). This list is not meant to be an exhaustive list; rather, it is meant to reflect the diverse range of fields and individual stocks within each sector. This may very well be why many prospective investors shy away from making their own investment decisions. The plethora of opportunities can be overwhelming to many people. The IPO System The equities market generates wealth in several different ways. As private companies expand, they come to a point where they need more capital to finance further growth. Many times the solution to this problem is to offer stock in the company to the public through an initial public offering (IPO). To do this the company hires the services of a brokerage firm to underwrite its stock, which means the brokerage will buy all the shares the company is offering for sale. The brokerage then charges a commission for managing the IPO and generates cash by selling the shares to investors. The commission is usually about 10 percent of the total value of all shares. There is a misconception among many people who believe a company makes money every time a share of its stock is traded after its IPO, but that simply is not true. Companies get the IPO money, and that is it. From that point on, the money derived from the buying and selling of a companys stock is passed back and forth between the actual buyers and sellers. The IPO is an avenue provided by the stock market for a company to fund expansion. If the expansion succeeds and the company prospers, it will hire more people and buy more raw materials from other companies. This process contributes to the expansion of the economy as a whole, generating wealth that would not have existed without the stock market. Investors who profit from a successful IPO also create wealth for the overall economy. If they buy low and sell high, they have made a profit that improves their standard of living and their ability to buy goods and services. They also use stock profits to start small businesses, reinvest in the stock market, or add to their savings. This process of putting stock profits back into the economy helps the economy grow over the long term and is a vital component of economic prosperity. If a company increases its profits year after year, its stock price will rise. The increase in price is the result of the law of supply and demand. When the company went public it issued a limited number of shares, called a float or the number of shares outstanding. As the demand for these shares increases, the supply decreases. In this situation, the price will rise. Companies definitely benefit when their stocks are in great demand. A companys market capitalization, the value of all shares of its stock, will go up. Market capitalization is computed by multiplying the current stock price by the number of outstanding shares. The equities market is a powerful mechanism of the capitalist system. It has an enormous influence on the business cycle, because it creates wealth and stimulates investment in the future. This is also why it should be no surprise that the stock market is so sensitive to economic news such as an interest rate change. The economy is a fluid system, one that evolves through predictable ups and downs. Investors will buy stocks when it appears that companies will be able to use the capitalist system to improve their earnings. They will sell stocks when it seems that economic woes are on the horizon. This buying and selling is prompted by economic news that provides the clues to the direction the economy is taking. All that said, the IPO market is one of capitalisms greatest gifts because it provides a mechanism for companies to expand and create wealth in the future. |
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