Stocks and Bonds

The Financial Markets

Explore the basics of equity (stock) and debt (bond) instruments.

A financial market is where buyers and sellers come together to transfer financial instruments - stocks, bonds, and other pieces of paper with some underlying value. These pieces of paper are also known as securities.

The Federal Reserve sells Treasury Bills, Notes and Bonds. Municipalities sell their own bonds, which have special tax advantages.

Corporations sell bonds to finance new projects. These are all different markets. And there are similar markets, for every kind of stock or bond, all over the world. But when people ask about ‘the market’ they are talking about the U.S. stock market, the largest and most complicated financial market in the world.

Mentioned in the same breath with the words ‘stock market’ are usually a couple of numbers. One number that is always mentioned is the Dow Jones Industrial Average (the Dow for short). The Dow is computed by adding together the stock prices of 30 major industrial companies and adjusting for stock splits over the years. (When the price of a stock gets too high, it splits, usually in half. The idea is that more people can afford to buy stock if the price of a single share is kept low.)  People watch the Dow because it shows relative performance, how things have gone up and down over the years. It’s an index of how the market is doing.

Another important U.S. index that is mentioned as part of the daily financial news wrap-up along with the Dow Jones Industrial Average, is the NASDAQ Composite Index. This index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. This index is comprised of over 5,000 companies and has a strong representation of technology-oriented companies such as Microsoft Corporation and numerous “dot com” companies. This index performed very well in the 1980s and 1990s but is considered extremely volatile especially after the “dot com” technology sector downturn.

The Standard & Poor’s 500 Composite Stock Prices Index (‘S&P 500’) covers 500 of the largest stocks in the country. There are many other indexes. The Russell 2000 Index has the smallest two-thirds of the 3000 largest U.S. companies. Many of the hot new stocks of the past decade are in it. The Wilshire 5000 Index includes all stocks traded on exchanges and over-the-counter (not on an exchange). It is the broadest measure of how stocks are performing.