The Dow Jones Industrial Average (the “Dow”) is

is the oldest and most famous index. It is an average of the stock prices of 30 of the largest companies, each hand-picked by the editors of the company (Dow Jones) that publishes The Wall Street Journal. These are McDonald’s, Disney, Microsoft, and other household names—big stocks like these are called blue chips. Since 30 stocks is only a small sample of the very biggest multi-billion-dollar companies, the Dow doesn’t always provide an especially accurate reading of where the entire market is going.

What Are the Dow, S&P, and NASDAQ?

There are about 15,000 U.S. stocks that change hands every day, but not even Wall Street professionals can keep constant track of them all. Instead, people talk about the performance of the “stock market” as a whole, and Wall Street has developed some gauges to give investors a clearer perspective on where “the market” is moving. These are the various averages or indices that people make such a big deal about when they talk about financial markets. Think of them as thermometers, except instead of measuring temperature, they tell you whether the stock market is heating up or cooling down.

How Do Stocks Make (and Lose) Money?

When you own stock, you don’t get interest like you would earn if you kept your money in a savings account, but certain companies do pay dividends to every shareholder. 

Dividends are the way companies distribute their profits to the investors who own them and are entitled to share in their success. The amount paid per share tends to change as the company’s profits rise and fall. This is one reason why investors watch those quarterly earnings reports so closely. Depending on the company, dividends can be paid every quarter, once a year, or whenever the board of directors decides to distribute the profits. Old or conservative companies like banks and utilities generally pay dividends because they no longer need to use their profits to grow or improve their operations—they’ve gotten about as big as they’re going to get, so they might as well share the profits. Younger companies in more innovative industries like computer technology or drug research tend to skip the dividend payment and plow those profits back into their research or marketing budgets. 

When these growth-dependent companies ruled the market back in the 1990s, dividends became an endangered species, but they’re making a comeback now as investors return to more triedand- true types of stocks. The other way to make money from stocks is to sell your shares for more than you paid for them. This is the old “buy low, sell high” approach that you’ve probably heard about. It sounds easy in theory, but it’s hard to achieve consistently because nobody really knows in advance the perfect time to buy or sell. Most advisors believe that the average person is better served by simply buying quality investments (of any type) at a reasonable price and then holding onto them until she needs the money to fund retirement or for some other purpose. Of course, what counts as a “reasonable” price depends on your investment goals and how much you’re willing to pay to achieve them. The ability of stocks to become more valuable is called capital appreciation, and your profit (or capital gain) from buying low and selling high is simply the difference between the two prices. 

Naturally, it’s possible that a stock will decline in value after you buy it, in which case you would be looking at a capital loss if and when you sell. Every company is different, and there’s no easy way to pick a winner.

What is the Difference between a Bull Market and a Bear Market?

When demand for stocks is generally rising (pushing prices higher as the number of would-be buyers climbs), we are in a bull market period. When demand for stocks falls and prices slump, we call it a bear market. Both bull and bear markets can last months, years, or even decades, but nobody has found a way to reliably predict when they will begin or end. (Sad, but true.)

Think of stock trading as organized haggling.

Someone who wants to buy a stock makes a bid of a certain amount of money per share and announces how many shares he or she wants. Meanwhile, investors who want to sell their shares are setting the asking price that would-be buyers will have to pay; this works a lot like an asking price when someone is selling a house. 

There are millions of people in the market and everyone is trying to get the best deal they can, so prices can move wildly in just a few minutes. 

Any number of factors can influence a company’s stock price, which is where the risk factor comes in. Sometimes a company or a whole industry simply becomes fashionable or falls out of favor, like Enron and many of the dot.com Internet companies did. Investors also tend to react strongly to new information (or even rumors) that lead them to believe that a stock price will move up or down. 

New information that indicates a company is doing better than expected tends to make its stock go up, while bad news can have the opposite effect as shareholders put their stock up for sale. Investors are especially sensitive to news that affects a company’s profits because a company that is making money (a profit) instead of losing money is obviously more likely to stay in business and even thrive. Every company that has publicly traded stock is required by law to report its financial performance every three months in a quarterly earnings report. This report includes an estimate of how much money the company made (or lost) per share. 

A good report can mean good news for the stock price. However, the reverse can happen as well, with stocks going down after a company reports good news (maybe it wasn’t good enough) or up after a bit of bad luck (maybe it was better than what most people expected)

Chapter Three: Understanding Stocks, Bonds, and Investing in Financial Markets

Even though there’s a pretty good chance you have some money invested in the stock market, the charts, ticker symbols, and jargon of the financial markets can leave many of us feeling like we’ve gone to another planet. TV reporters spend a lot of time talking about how well the Dow did or where Treasury yields are headed … but what does it mean? More importantly, what does it mean to you? 

This chapter can’t decode all the ins and outs of stocks and bonds, but it should help you with the fundamentals so you can make the right investment choices for your future. For many people, the stock market and discussions about bonds and mutual funds make them tune out. 

But with the decks stacked against women when it comes to preparing for their retirement, investing is one of the best ways to make your savings go a long way. Some people approach investing as if they were shopping for a car. Some are drawn to the flashy convertible. Some want the sedan with a few bells and whistles that will get them to and from work in comfort. 

And some want the sturdy old station wagon. No matter how you approach investing your retirement savings, the most important thing is to know the basics so that you can make sound financial decisions. Nobody can predict the stock and bond markets. Generally speaking, you have to accept some risk in order to have a chance to receive some reward. If anyone promises you a very high return with little or “no” risk, be skeptical. While relatively safe investments sometimes double or even triple in value in a short time, this is a matter of luck, not a sure thing. So the more knowledge you have, the better your chances are of having your retirement savings work for you for decades after you retire. 

Let’s begin with the basics facts about stocks and bonds. Stocks 101 A stock is a measure of ownership in a company. Stock is sold in units called shares, each of which represents a bit of the company. Most major companies have literally millions of shares divided up among different people and financial institutions, all of which are collectively called shareholders. 

Because investors are constantly buying and selling their shares, the price per share (the number you see quoted when you look up a stock or see a news story about it) changes every day and sometimes minute to minute, depending on how often the stock is traded.

It’s Your Tomorrow

Retirement isn’t all about calculators and special accounts. But if you spend some time setting things up ahead of time, your retirement can be so much richer. Maybe you have something luxurious in mind, like plenty of money for travel or a villa nestled in the hills. Maybe you want to spend your time on a favorite hobby, or strolling along the beach. Maybe you want to be able to help out your family. 

Or maybe you just want a paid-for house and plenty of time with the grandkids. No matter what the details, some up-front planning can help you create a retirement fund that will enable you to accomplish the most important objective: 

When the time comes, you can retire in comfort and dignity. This means having money to cover your basic needs, money for your health care, money to let you pay your own way. It can mean there will be no need to call on the charity of others, and no need to continue working longer than you are physically able. And, with a little luck, it means having money for your dreams.