"The Dow Jones Industrial Average finished up 80.61 points, or 0.8 percent, to 10727.19, off its highs for the day, after rising 10.60 points the previous session," The Wall Street Journal reported on July 11, 2000. The Journal also reported an increase in blue chips, a result of positive quarterly earnings reports and statements from Federal Reserve Chairman Alan Greenspan that did not yield concerns about interest rates. The Nasdaq Composite Index, however, ended lower. You may be wondering exactly what all of these headlines mean and how to interpret them. The next two chapters are intended to provide a quick overview of the financial markets and what drives them, and introduce you to some market lingo as well. For reference, many definitions and explanations of many common types of securities can be found in the glossary at the end of this book.

Bears vs. bulls

Everyone loves a bull market, and an investor seemingly cannot go wrong when the market continues to reach new highs. At Goldman Sachs, a bull market is said to occur when stocks exhibit expanding multiples -- we will give you a simpler definition. Essentially, a bull market occurs when stock prices (as measured by an index like the Dow Jones Industrial or the S&P 500) move up. A bear market occurs when stocks fall. Simple. More specifically, bear markets occur when the market has fallen by greater than 20 percent from its highs, and a correction occurs when the market has fallen by more than 10 percent but less than 20 percent. The most widely publicized, most widely traded, and most widely tracked stock index in the world is the Dow Jones Industrial Average. The Dow was created in 1896 as a yardstick to measure the performance of the U.S. stock market in general. Initially composed of only 12 stocks, the Dow began trading at a mere 41 points. Today the Dow is made up of 30 large companies in a variety of industries and tops 10,000 points. In November 1999, the Dow Jones updated its composite, adding and removing companies to better reflect the current economy. Union Carbide, Goodyear Tire & Rubber, Sears, Roebuck & Co., and Chevron were removed. Microsoft, Intel, SBC Communications, and Home Depot were added.

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The Dow and Nasdaq

The Dow has historically performed remarkably well, particularly in the late 1990s. In 2000 the Dow soared above 11,000 points. Propelling the Dow upward was a combination of the success of U.S. businesses in capturing productivity/efficiency gains, the continuing economic expansion, rapidly growing market share in world markets, and the U.S.'s global dominance in the expanding technology sectors. Although the Dow is widely watched and cited because it's comprised of select, large companies, the Dow cannot gauge fluctuations and movements in smaller companies.

The Nasdaq Composite has garnered significant interest in recent years. The Nasdaq stock market is an electronic market on which the stocks of many well-know technology companies (including Microsoft and Intel) trade. In early 2000, the Nasdaq stock market became the first to stock market to trade two billion shares in a single day.

In 2000 both the Nasdaq composite and the Dow reached all time-highs. As the markets soared, critics warned that a bull market could not continue indefinitely. In April 2000, the markets suffered a serious hit which some optimistically called a correction that would eliminate companies which couldn't compete. More pessimistic observers called the down shift in the markets a "burst of the Internet bubble."

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A Word of Caution

While the Dow may dominate news and conversation, investors should take care to know it has limitations as a market barometer. For one, the Dow can be swiftly moved by changes in only one stock. Roughly speaking, for every dollar that a Dow component stock moves, the Dow Index will move by approximately three points. Therefore, a $10 move in IBM in one day will cause a change in the Dow of 30 points. Also, the Dow is only composed of immense companies, and will only reflect movements in big-cap stocks.

Other benchmarks

Besides the Dow Jones and the Nasdaq Composite, investors follow many other important benchmarks. The NYSE Composite Index, which measures the performance of every stock traded on the New York Stock Exchange, represents an excellent broad market measure. The S&P 500 Index, composed of the 500 largest publicly traded companies in the U.S., also presents a nice broad market measure, but, like the Dow is limited to large companies. The Russell 2000 compiles 2000 small-cap stocks, and measures stock performance in that segment of companies.

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