Understanding the Dow Jones Industrial Average, the S&P 500 and the NASDAQ

The Dow Jones Industrial Average, S&P 500 and NASDAQ are published daily but are still difficult for some to understand.

Mikey Manghum is the new vice president of Regent Private Wealth and he joined News On 6 to explain some of the basics.

Mangum said a stock is defined as “a small portion of ownership in a company” that investors buy in the hopes that the company will grow and increase the value of their investment. He contrasts this with investing in market indices such as the Dow Jones or S&P 500, which are “collections” or “compositions” of many different companies.

Mangum explains: “If you had a single window pane and you threw a rock through that window, and it was a single stock, the whole thing would be broken and you would have to replace it. So there’s some risk in the investment.” So people want to diversify that risk and have created a window with maybe 16, 20 or 500 different little window panes in it.

The effects of the stock market

Mangum acknowledges that many people wonder how the ups and downs of the overall stock market affect their personal investments and the economy. He points out that the effect depends on how diversified a person’s portfolio is:

“If you have all your money in the S&P 500 and you hear that the market is down, it’s more than likely that you’ll see that reflection there when you log into that account. But if you have maybe some real estate inventory, and you have a separate business, and you have a little money invested in the market and maybe some bonds, or you have some things that don’t correlate with each other, precious metals, things of that nature , then it won’t have as big an impact on your overall portfolio as the things you invest, especially through the movement of the stock market.

Invest in individual stocks

Mangum points out that investing in individual stocks carries more risk than investing in diversified funds or indices. He points out that investing in individual stocks is “more of an advanced move” that requires a deep understanding of the company and its industry. He explains: “The risk is not necessarily in the investment, but in the investor.”

Retirement investments

Finally, Mangum discusses how retirees should adjust their investment strategies as they move from building wealth to reducing it. He suggests a more conservative approach with a larger allocation to bonds and cash equivalents to reduce volatility.