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The same theory applies with corporate profits. Corporate profits also tend to move upward, but sometimes the economy hits a bad patch and profits fall. As with the bird, economies don't usually crash all the way back to ground zero. Yes, it's possible that if a huge meteor smashes into the Earth or a horrible, contagious virus spreads like wildfire, society may be done for—people and companies may cease to exist and make a profit. In the meantime, why not share in the expansion of the economy and keep an optimistic view on life?
What Is ”The Market”)
So you invest in stocks to share in the spoils of capitalistic economies. When you invest in stocks, you do so through the stock market. What is the stock market? Everybody talks about "The Market"the same way they do a small group of close personal friends. You know, they use the person's first name only, as if only one Simon exists in the world.
"The Market is down 37 points today."
"With The Market constantly hitting new highs, isn't now a bad time to invest in The Market?"
"The Market's up more than 30 percent thus far this year. It seems ready for a fall."
Chapter 5: The Stock Market and Valuations
If you've ever lived near New York or talked with New Yorkers, you've perhaps heard them refer to The City. New Yorkers use the term The City because they assume that you know what they're talking about: The City, as in New York City, or more specifically, Manhattan. Shame on anyone who thinks thatyou're referring to Brooklyn or Staten Island!
When Americans talk about The Market, they're usually referring to the Dow Jones Industrial Average, created by Charles Dow and Eddie Jones. Dow and Jones, two reporters in their 30s, started publishing a paper that you may have heard of—the Wall Street Journal — in 1889. Like its modern-day version, the nineteenth-century Wall StreetJournalreported current financial news. Dow and Jones also compiled stock prices of larger, important companies and created and calculated indexes to track the performance of the U.S. stock market.
The Dow Jones Industrial Average (DJIA) market index tracks the performance of 30 large companies that are headquartered in the U.S. The "Dow 30" includes companies such as telecommunications giant AT&T, airplane manufacturer Boeing, soda maker Coca-Cola, oil giant Exxon, automaker General Motors, computer industry behemoth IBM, software giant Microsoft, computer chip maker Intel, fast food king McDonald's, and retailer Wal-Mart.
The 30 stocks that make up the Dow aren't the 30 largest or the 30 best companies in the U.S. They just so happen to be the 30 companies that senior staff members at the Wall Street Journal think reflect the diversity of the economy in the U.S. Some criticize the Dow index for encompassing so few companies and for a lack of diversity. The 30 stocks in the Dow change over time as companies merge, decline, and rise in importance.
Here at home, "The Market" usually refers to the Toronto Stock Exchange. While there are other exchanges throughout the country, it's on the TSE that our largest and most well-known companies trade. When people talk about how "Toronto" performed, they are almost always referring to the TSE 300 composite index.
Like the Dow Jones Industrial Average, the TSE 300 tracks the performance of larger-company Canadian stocks. As its name suggests, this index tracks the prices of 300 stocks that trade on the Toronto Stock Exchange. In general, the index is made up of the companies with the largest market capitalization — their stock price multiplied by the number of shares outstanding. Companies that are included in the index must meet a number of other criteria. In addition to having traded on the exchange for at least six months, at least $1 million worth of the company's stock must have changed hands in a minimum of 100 transactions, with at least 100,000 shares index. There are also 14 sub-indexes of the TSE 300. These are used to assess the performance of many different industries. The subgroups are gold and precious metals, oil and gas, paper and forest products, consumer products, industrial products, real estate and construction, utilities, communications and media, financial services, merchandising, conglomerates, transportation and environmental services, and pipelines.
Part II: Stocks, Bonds, Bay and Wall Street
Major stock market indexes
Just as Manhattan and Toronto (thankfully) aren't the only cities to visit or live in, the 30 stocks in the Dow Jones Industrial Average and the 300 in the TSE Composite are far from representative of all the different types of stocks that you can invest in. Here are some other important market indexes and the types of stocks that they track:
S&P/TSE 60. This index was introduced in 2000 to replace the TSE 35 and TSE 100 indexes. It was developed by the TSE in conjunction with Standard & Poor's Corp. of New York. To be considered for the index, a company must be part of the TSE 300 index, but those with poor liquidity or small market capitalization don't make the grade. An index committee then chooses 60 companies that offer a representation of 11 major industries: basic materials, capital goods, communication services, consumer cyclicals, consumer staples, energy, financials, health care, technology, transportation, and utilities.