Stock Investing Basics: Chapter 3 -- The Stock Market

Chapter 3
The Stock Market

So, just what is this “stock market” we hear about on the television and read about in the newspaper and Internet? Well, it depends.

Sometimes, when “the market” is referenced, it means the entire global market, as in “The stock market is down today, based upon these 5 indexes.”

Other times, “the market” means the S&P 500, which is not a market but an index (more on that later).

Still other times, “the market” means the New York Stock Exchange or some other “market.”

To be precise, it's this latter use of the term “the market” that makes the most sense and is strictly the best definition.

Think of it this way: When you go to the grocery store, you've gone to “the market” for groceries. You didn't go to 18 different places and check the general level of prices. You didn't check on potatoes at Safeway, oranges at Lucky, and yogurt at Trader Joes. You didn't survey the price of a basket of goods in Chile, Pakistan, and England.

You went to your local grocer and bought some things. That's your market.

In any event, in a very generic way, people say they invest in “the stock market” when they really mean they invest in stocks. When you shop for bread, you may want the cheapest wheat bread. Or you may want the best price for a certain brand; you may shop in two or three different stores to find it. Or you may say, “The heck with this! Bread is too expensive. I'll buy another type of starch to satisfy my starch needs.” Or, “I'm going on the South Beach Diet anyway and can't eat bread for a month!”

All that said, it's obvious that there's more than one way to look at all of this. This is where “stock picking” gets really interesting. I'll go into more detail later, but here are some brief examples of different approaches one can take when investing in individual stocks.

You may know of a stock that you want to investigate, perhaps its a retail store that you think has potential (let's say it's Whole Foods – organic and green is in, cheap is out). In doing your research, you find that it's price is a little depressed compared to where you think it ought to be, but you find that one of its competitors is even more compelling. So, you investigate it, too, and you find that the whole industry is depressed and poised for a run up in price.

You've gone from evaluating individual stocks to evaluating an entire industry. Maybe you found in your research that a grocery competitor based in Canada was an even better prospect. Now, you look into Canada and you find that it is resource-rich, it's currency is strong, and it just signed a trade agreement with, say, China.

Now you're interested in investing in the entire country. See how this works?

You can invest in

• individual stocks (like Wal-Mart)
• an industry (like Retail)
• a country (like the USA, in the form of a widely-known index like the S&P 500)
• a region (like Asia, in the form of an Exchange Traded Fund that mirrors the Bank of New York Asia 50 ADR Index)
  

As you can guess from this, there are stocks, mutual funds, ETFs, and other ways to invest in “the stock market.” Next up, we'll talk about these instruments.

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