Almost all stock markets are auctions. Where traders come together to buy and sell ownership shares in companies, investment bonds, and other investment items. Similar to most auctions, prices are driven by supply and demand, the value of the item or the perceived value. It's this reason that prices continually change on the market.
Usually, when people refer to "the market" they generally mean the U.S. stock market as measured by the Dow Jones Industrial Average. The Dow tracks the stock of 30 large, well-known companies such as General Electric, Coca-Cola, Exxon and IBM.
The editors of The Wall Street Journal choose the companies tracked by the Dow. The list changes periodically as companies merge, lose prominence, or rise to the top of their industry.
The Dow is an index, which is simply a way to judge the overall market trend by looking at a sample of it. In other words, the performance of the 30 stocks in the Dow Jones Industrial Average is used to represent the performance of the entire market.
The Dow is the most widely used index, but there are other indices used to help gauge the market. One is the Standard and Poor's 500, also known as the S&P 500. It tracks the 500 largest U.S. companies and is considered a more accurate model of the overall stock market because its larger sample accounts for about 75% of the value of the U.S. stock market.
It is important to understand the difference between an index and an index mutual fund. You can't invest in an index; and indices are not managed and do not reflect fees. Index mutual fund managers typically try to mimic an index by purchasing shares in companies that are listed in that index.
Note: that investing in index mutual funds involves risks including possible loss of principal.
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