Industry Overview: The Equity Markets

by Derek Loosvelt | March 10, 2009

Bears vs. bulls

Everyone loves a bull market, and an investor seemingly cannot go wrong when the market continues to reach new highs. At Goldman Sachs, a bull market is said to occur when stocks exhibit "expanding multiples" - we will give you a simpler definition. Essentially, a bull market occurs when stock prices (as measured by an index like the Dow Jones Industrial or the S&P 500) move up. A bear market occurs when stocks fall. Simple. More specifically, bear markets occur when the market has fallen by greater than 20 percent from its highs, and a "correction" occurs when the market has fallen by more than 10 percent but less than 20 percent.

Market benchmarks: The mighty Dow Jones

The most widely publicized, most widely traded, and most widely tracked stock index in the world is the Dow Jones Industrial Average. The Dow was created in 1896 as a yardstick to measure the performance of the U.S. stock market in general. Initially composed of only 12 stocks, the Dow began trading at a mere 41 points. Today it is made up of 30 large companies in a variety of industries and tops 10,000 points. In October 1996, Home Depot, SBC Communications, Intel and Microsoft were added to the Dow. Microsoft and Intel were notable additions as the first Nasdaq market stocks ever added to the measure. The Nasdaq Stock Market was generall considered the market of technology and small company stocks, but the boom in technology stocks has altered that perception to some degree.

Other market benchmarks:

Besides the Dow Jones, investors follow many other important benchmarks. The NYSE Composite Index, which measures the performance of every stock traded on the New York Stock Exchange, represents an excellent broad market measure. The S&P 500 Index, composed of the 500 largest publicly traded companies in the U.S., also presents a nice broad market measure, but, like the Dow is limited to large companies. Technology and smaller stocks comprise the Nasdaq Index, so that benchmark is followed by investors who focus on these market segments. The Russell 2000 compiles 2000 small-cap stocks, and measures stock performance in that segment of companies.

~Big-cap and small-cap

At a basic level, market capitalization or "market cap," represents the company's value acccording to the market," and is calculated by multiplying the total number of shares by share price. (This is the equity value of the company.) Companies and their stocks tend to be categorized into three categories: big-cap, mid-cap and small-cap.

While there are no hard and fast rules, generally speaking, a company with a market cap greater than $5 billion will be classified as a big-cap stock. These companies tend to be established, mature companies, although with the market valuation of Internet companies going haywire, this is not necessarily the case. Sometimes huge companies with $25 billion and greater market caps, for example, GE, Microsoft and Mobil, are called mega-cap stocks. Small-cap stocks tend to be riskier, but are also often the faster growing companies. Roughly speaking, a small-cap stock includes those companies with market caps less than $1 billion. And as one might expect, the stocks in between $1 billion and $5 billion are referred to as mid-cap stocks.

What moves the stock market?

Not surprisingly, the factors that most influence the broader stock market are economic in nature. Among equities, Gross Domestic Product (GDP) and the Consumer Price Index (CPI) are king.

When GDP slows substantially, market investors fear a recession. And if economic conditions worsen and the market enters a recession, many companies will face reduced demand for their products, company earnings will be hurt, and hence equity (stock) prices will decline. Thus, when the GDP suffers, so does the stock market.

When the CPI heats up, investors fear inflation. Infla

Filed Under: Finance


Banking & Finance A Brief History of Private Equity

Vault welcomes your views. Please stay on topic and be respectful of other readers. Review our User Guidelines.

blog comments powered by Disqus

Featured Companies

Become a Vault Basic Member

Complete your Vault Profile and get seen by top employers