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can someone explain a stock market thing for me?(23 posts)

can someone explain a stock market thing for me?DougSloan
Mar 3, 2003 12:00 PM
We get home, and on the news there is always a report such as "The Dow is down today on news of President Clinton's impeachment," or something like that. It might be the weather, economy, war, whatever.

How in the world can anyone make an association, much less an apparent claim of cause-and-effect between some event and the stock market? Isn't the market participated in by millions of investors, with I-don't-know-how-many individual stocks, most of whom would have vastly different motives and influences?

What am I missing here? It's like they portray the stock market as a flock of birds diverting from hitting a building or something. I don't understand how anyone could attribute cause-and-effect, much less a single cause, to stock market movement.

Any experts care to share some light on this? Thanks.

Doug
re: can someone explain a stock market thing for me?TJeanloz
Mar 3, 2003 12:07 PM
First, the media are idiots and just reporting what they think they know. That said, the market isn't stupid. If there is an event which is generally understood to be bad for the economy, more people will be in the mood to sell their stocks than buy them, and the market will move downward. Keep in mind that the Dow is comprised of only 30 stocks- and not necessarily a reflection of the whole market.
kind of ...sacheson
Mar 3, 2003 12:25 PM
... I will qualify any answer I give by saying I'm a programmer. I am not in any way affiliated with any type of financial or investing institution, and what little knowledge I have is from asking questions and losing what little money I do have ...

With that --> you talk about the rise and fall of the Dow, the Dow Jones Industrial Average is nothing more than a portfolio of a few companies that are *supposed* to be indicators of the market as a whole. I've heard arguments both for and against the Dow, but it is a standard, and people will be making measurements to it for the foreseeable future. You can find a list of the companies at: http://www.djindexes.com/jsp/industrialAverages.jsp?sideMenu=true.html

You'll also see indexes where people claim to "beat the Dow". Basically, their compiled return on their portfolio of stocks will be a greater percentage of increase than the Dow average (mind you, that doesn't always equate to dollars returned).

As for the whole stock market thing, you have to understand that even though there are a lot of people that hold a lot of shares, for the most part large shareholders are not individuals. They can be a collection of individuals, a company representing individuals, corporate interests, etc. and when they make a decision to sell shares of something, it's usually a blanket decision. Therefore, even though you and I could buy and sell a whopping 10 - 100 - 1000 shares of a company and make our small fortunes, that might map out to a whopping .00005% of the available shares the company has to offer. If we sell all of our stocks, it is drops in the bucket to these players. When large entities start to sell off, they're doing it in whole percentages. If enough people sell off a few percent, that can a) reduce your revenue from being publicly traded and b) send a signal to others (including those like ourselves), and all of the sudden a company has lost many, many percent of their perceived value.

It would be easy to go on for pages, but in doing so, I'd only bore myself to death, probably make more errors in my descriptions, and get into senseless crap. For now, if you are interested, may I suggest reading up on Mutual Funds (a portfolio of stocks that you buy as one entity). They are a nice way to break into investing with out having to deal with that day trader stress, and a good place to start learning about the market.
One more thing:sacheson
Mar 3, 2003 12:34 PM
I was watching some investment show on MSNBC.com one morning. They had some financial strategist from the Motley Fool on there (www.fool.com). He said the stock market existed for two reasons:

1) to give people like him jobs
2) so companies had another incentive for their employees.

I thought that was interesting.
Short term tradersPaulCL
Mar 3, 2003 12:26 PM
A large percentage of market volume is done by floor traders and short term traders. They might buy and sell several times per day - they follow trends. They trade huge amounts of stock at a time - millions of shares. In addition, the computers (for mutual funds, endowments, institutions, etc) trade 'baskets' of stocks. Let's say there was geopolitical news that affected defense stocks negatively, they went down somewhat but their average or index went below some technical level. That technical breach could trigger baskets of defense stocks to be sold by the institutions, then followed by short term traders. Two or three defense stocks in the DOW could push the average down 30 or 40 points quickly. It doesn't take much to move the market.

As TJean pointed out, there are only 30 stocks in the DOW. If 29 Dow stocks were even at the close today, but one was down 2 points, the overall index would be down about 16 points. They would call that a "negative" day.
Paul, can you explain your formula?sacheson
Mar 3, 2003 12:37 PM
The 1 share price down 2% = 16% downturn in Dow.

Just interested. Thanks!
That was just an example,TJeanloz
Mar 3, 2003 12:47 PM
The DJIA is a price-weighted index, which is calculated by summing the prices of the 30 component stocks, and then dividing by the "divisor", which is a number that is constantly changing to reflect stock splits (et. al.) and is currently 0.14279922. The net result of this is that stocks with higher prices have a larger impact on Dow movements.
formula?PaulCL
Mar 3, 2003 12:52 PM
The formula changes every quarter. But essentially, take the value (not percentage) a DOW stock is up or down that day and multiply it by about 8 for the change of the index.

For example, today ExxonMobile is up $0.40 or a +3.20 for the index. While, United Technologies is down $1.05 or a negative 8.40 points to the index.

The DOW is an even weight index. Meaning, each stock has the same value to the index. It changes based upon change in stocks, ex-dividends, and splits. The S&P 500 and Nasdaq comp averages are capitalization weighted. For example in the S&P, GE is the largest company vs #500 XYZ (I have no idea). But a $1 move in GE will affect the S&P average at least 100x more than a $1 move in XYZ. Within the NASDAQ index, I believe Intel, Cisco, Dell, SunMicrosystems, Yahoo, and Oracle account for 40% of the index. The other 2000 stocks account for the remaining 60%. Don't quote me on that one - its' an educated guess. paul
DJIA is price weighted, not equal,TJeanloz
Mar 3, 2003 1:11 PM
Contrary to the above, higher priced stocks exert more force on the DJIA than lower priced stocks. If 3M loses 1% of its value ($1.25), the DJIA will lose almost 9 points. If McDonalds loses 1% of its value ($0.13) the DJIA will lose less than 1 point.

The bias is less than you see in a market-cap weighted index like the S&P500, but is still present and relatively major.
And I thought typing code was a confusing clusterf#$% of a job!sacheson
Mar 3, 2003 1:59 PM
Switch to VB! (nm)czardonic
Mar 3, 2003 4:32 PM
UncertaintyMe Dot Org
Mar 3, 2003 12:28 PM
The market fears the unknown. In your example, a President facing impeachment will not be expending energy to confront problems in other areas, i.e., the economy, foreign policy, etc...

Right now the market is uncertain about war with Iraq. It is not the war per se that frightens the market (although war will undoubtedly make the deficit larger). If the market perceived the war to be a zero risk task, I'm sure stock prices would be higher. It is the unknown or unintended consequences of war that makes investors jittery.

Businesses like known costs.
good explanations, butDougSloan
Mar 3, 2003 1:29 PM
It may be that the media people just need to say something, so they pick something. Uncertainly seems like a probable influence. However, how would anyone pick THE cause for a certain move, unless it's glaringly obvious ("The US invades Iraq [which we have already begun, BTW, but that's another thread]...")?

I hear reports like "Stocks up today due to reports of stronger transportation sector profits last quarter." Huh? With a million other things going on in the world, why focus on this one? Do they interview big investors and ask them what motivated their trades today? Is it pure speculation? Or, more insidiously, are they trying to shape public opinion or the market itself? That's what I'm getting at.

Doug
Maybe they use historical data to guess causation?(nm)czardonic
Mar 3, 2003 1:37 PM
BingoCaptain Morgan
Mar 3, 2003 1:44 PM
Not to mention a little sensationalism (both to the upside and to the downside). Gotta keep those viewers/listeners/readers so we can sell that advertising.
good explanations, butTJeanloz
Mar 3, 2003 1:38 PM
It's an analysis of what occurred in the trading day. Say, for example, that most of the Dow stocks were down mildly (less than 1%) but JP Morgan Chase came out and said that their Q4 profit was double what they had anticipated. American Express and Citigroup haven't announced their profits yet, but since they're in the same industry as JP Morgan Chase, the market presumes that they have also done better than expected. So these three stocks rise dramatically, and the overall index is up 15 points. The reporter then says something like: "Stocks up today on the news that financials had a better than expected Q4". Not all stocks were up, but the news directly effected enough stocks to bring the composite up.
Yeah, but how about the truly ludicrous stuff?OldEdScott
Mar 3, 2003 1:53 PM
"Stocks plunged today on fears that fears of an interest-rate hike next week might cause fears of inflation ..." You know the 'fears of fears of fears' explantion that raises images of wide-eyed traders huddled and shaking and terrified ... "Wow, I'm worried that people will worry that next week we'll be worried ... So sell cheap and get the hell out."

It sounds nutty to me.
exactly; better example of what I was talking about nmDougSloan
Mar 3, 2003 1:58 PM
one simple truthmohair_chair
Mar 3, 2003 2:10 PM
Stock brokers can rationalize anything.
I think they just make those up (nm)TJeanloz
Mar 3, 2003 2:30 PM
Sorry to be so late,moneyman
Mar 3, 2003 3:21 PM
But I think I can add to this discussion. The same question has occurred to me as each morning at 5:10 am, listening to NPR, they neatly encapsulate the prior days trading on the NYSE of 1.4 billion shares as up or down for one particular reason. I really believe they do this out of the fact that their time is so limited. If you want to explore the multitude of reasons stocks move the way they do, prepare for a lifetime of study. Then prepare to get it wrong an awful lot of the time. For the business reporter to try to make heads or tails of the movements of the market in 30 seconds is impossible.

As others have said, the Dow is only made up of 30 stocks that represent the different sectors of the economy. It has become so pervasive because it has been used for so long. There are many more indexes much more representative of the market than the Dow, i.e., the Wilshire 5000 or the Russell 2000. So when the hapless reporter says the Dow was up, it really doesn't mean a lot to you unless you own it. The reporters just give us something to talk about.

$$
They need to sound like they know what they are talking about...VertAddict
Mar 4, 2003 12:40 AM
My view on it is that 9 times out of 10 there is no pat explanation for a move in the market, especially moderate ones. There are always explanations you can come up with on a given day, probably more than a dozen without trouble, that would expain a move up or a move down on that particular day. So they just pick one or two, barf it out, look authoritative, make you feel informed, and you come back to get "informed" again tomorrow.

Don't get me wrong, there are times when a market move, especially a very large one or a longer-term trend, can be adequately explained. It's the 30 point up or down move that just doesn't bear discussion - there are literally thousands of individual events underlying a small net move like that.

Here's an informative point: I work in the (much-maligned) energy trading industry, and it was interesting that a few years back the brother of one of our junior market analysts was an anchorman for New York news station. There were some radical price moves in the market at the time, and he phoned her up to get some info on what was up. What I realized at that time was the multiple levels of uncertainty in what he ended up saying in his broadcast.

(1) He assumed that his sister and/or her coworkers actually knew the reason for the current moves in the market, a sketchy assumption.

(2) He assumed that the information he was given was accurate and complete, an assumption possibly even shakier than the first (after all, these are energy traders we're talking about! ;-))

(3) What came across to me really funny was that we watched the broadcast, and of course he had to present it in a way that appeared he knew what he was talking about. He was fairly persuasive, but of course had no real idea what the hell he was talking about.

You might keep these things in mind when you hear market commentary - then info an anchor gets from an analyst in the equity markets I'm sure isn't much different. Oh, and watch for the buzzwords - when the market declines after a run up, it's "short covering". The dead cat bounce after a decline is "bargain hunting". Or, as has been mentioned, there are the all-pervasive fears: interest rate fears, war fears, employment fears, consumer confidence fears, lawsuit fears, earnings warnings fears, blah blah blah the list goes on... ;-)
And they talk to each otherKeeponTrekkin
Mar 4, 2003 6:29 AM
And no one really knows so they rationalize. Markets move on information and expectation. A small number of traders moves the market. This is especially evident on certain trading days (e.g. the day before a 3 day weekend, 1/2 trading days like X-mas eve). Finally, traders want to make money and have no compunction about taking advantage of market inefficiencies or circumstances. Long term investors (individuals, pension funds, etc.) may take it on the chin in the short term but count on the long term fundamentals (strongly tied to the US and global economies).

KoT