Why the US Stock Market Index is Fluctuating
In the wake of September 11, US stocks plummeted, losing thousands of points in a matter of days. The market has been on shaky ground ever since. We’ll take a look at what has caused these fluctuations and what we can expect to see in the future.
The Dow Jones Industrial Average Explained
The Dow Jones Industrial Average (DJIA) is a stock market index that shows how 30 large, publicly owned companies traded during a standard trading session in the stock market. The average is calculated by adding up the prices of all 30 stocks and then dividing by 30.
The Dow Jones Industrial Average has been used as a barometer of the stock market and the economy since it was first published in 1896. It’s often referred to as the Dow or the Dow Jones.
The index is maintained by S&P Dow Jones Indices, a joint venture between McGraw Hill Financial and CME Group.
During a given trading day, the DJIA can fluctuate widely. A high for the Dow might be at one point in time only to see a low within minutes after that high. These fluctuations are caused by traders who buy and sell stocks from each other, depending on their beliefs about where they think the price will go next. They also act on news reports and company earnings announcements with shares.
The index is made up of only 30 components out of thousands that are listed on US exchanges. Some economists say this limitation causes problems with the accuracy of tracking economic changes because changes in more broad-based indexes may not be accurately represented.
Dow Jones Components
The Dow Jones Industrial Average (DJIA) is a stock market index that shows how 30 large, publicly owned companies traded during a standard trading session in the stock market. The DJIA was created by Charles Dow, co-founder of The Wall Street Journal.
Dow thought that by tracking the performance of these 30 large companies, he could get a good sense of how the overall stock market was doing.
The DJIA is calculated by taking the prices of all 30 stocks and then averaging them out.
The weighting of each stock in the index is based on its price.
So, if one stock price goes up $1 and another goes down $1, the DJIA would be unchanged. However, if every single company saw their share prices go up or down by at least 50 cents, the DJIA would move either way accordingly. Additionally, some of the larger companies in the DJIA are split into two different indexes: Standard & Poor’s 500 and Dow Jones Wilshire 5000. In total there are three main components to the Dow Jones Industrial Average: blue chips which represent 30 U.S.-based businesses with high market capitalization; America’s largest firms with international operations; and selected American industries such as healthcare or insurance.
A Look at International Stocks
When we think about stocks, it’s important to remember that the U.S. stock market is just a small slice of the global pie. In fact, there are over 60 major stock indices around the world. So what happens in other markets can have an impact on the US stock market index. For example, let’s take a look at what’s been happening in China lately. The Chinese economy has experienced some instability recently, and their stock market has plummeted as a result. As investors get nervous about other parts of the world (like China), they will often move money from these markets into more stable places like the US stock market index.
The Value of Investing in Stocks
The stock market is a volatile place, and the US stock market index is no exception. In the past year alone, we’ve seen the index fluctuate by over 3,000 points. So why does it still make sense to invest in stocks? One of the key reasons is that even though investing in stocks can be risky, stocks have historically had a higher return than bonds or other low-risk investments. A good example of this phenomenon is from 1980 to 2016: as you can see from this chart (link), bonds only increased about 2% per year, while stocks increased about 10%. That means that for every $1 you invested into the stock market instead of bonds, your money would grow 10 times more quickly! And with that growth, so too comes the fluctuations. If you were able to stay on top of those fluctuations and buy when there was volatility on the market, then theoretically you could profit off those changes in value. For example, if shares are trading at $100 each and the price falls down to $90 each, then people who bought at $100 will sell their shares at an inflated value since they’re worth less now. If someone buys these shares at $90, they’ll end up making a profit when they sell them later on when they rise back up again to their original price ($100).
Tips for Smart Investing
1. Do your research. When it comes to investing in the stock market, knowledge is power. The more you know about how the stock market works and what factors can affect stock prices, the better equipped you’ll be to make smart investment decisions.
2. Diversify. Investing in stocks from a wide range of companies helps reduce risk and provide for an overall higher return than if you put all your money into one company or industry.
3. Develop a plan for when to sell or buy shares of a company’s stock. If you’re buying a company’s stock because you think its future prospects are promising, set a time limit on your purchase (say six months) so that at some point down the road you either see the prospects coming true or realize that they never will. On the other hand, if you’ve been sitting on shares of a company that have taken an unexpected turn for the worse, consider selling them sooner rather than later to minimize losses.
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