Lesson 2: First Impression of the US Stock Market

Hi, everyone! Welcome to this session of the Tiger Academy  “First Impression of the US Stock Market.”

After being introduced to the investment strategies in the previous session, I think you now have a good understanding of what stocks are and some strategies used to invest. In this lesson, I’ll take you through four steps to complete the second investment strategy: Establishing an Overview of the US Stock Markets.

For traders in US stocks, it’s important to become familiar with the main trading markets, the three major indexes, market regulators, and famous companies before investing. This will help you understand the rules of the game for US stocks more clearly.

Let’s get started, I’ll take you through this lesson in four steps:

The first step is to learn about the markets that US stocks trade in.

A stock exchange is a place where the shares of listed companies are traded. It’s a bit like a farm produce market. Buyers and sellers can gather here to barter, but the stock market will be more complex than a farm produce market; prices will change faster and regulation will be stricter.

At this point, you need to know about the three main exchanges: the New York Stock Exchange (NYSE), the Nasdaq Stock Exchange (Nasdaq), and the American Stock Exchange (AMEX). Yep, you heard right AMEX, not to get you confused with the finance company, they’re seperate entities.

1. The New York Stock Exchange (NYSE)

The New York Stock Exchange is located in New York City. It’s the largest stock exchange in the world based on the total market capitalization of its listed companies.

The birth of the New York Stock Exchange can be traced back to May 17, 1792, when 24 securities brokers gathered under a buttonwood tree outside 68 Wall Street in New York to sign the famous Buttonwood Agreement. The New York Stock Exchange opened with trading in five securities, including three government bonds and two bank stocks.

Because the New York Stock Exchange is the leading US stock exchange, many of the oldest companies are listed there. For example, Consolidated Edison (ED) is the longest-listed stock on the New York Stock Exchange.

Of course, in addition to domestic US companies, qualified foreign companies can also be listed on the New York Stock Exchange. Some examples are China’s Alibaba and China Telecom, Finland’s Nokia, Japan’s Canon, and Germany’s Siemens, among others.

2. The Nasdaq Stock Exchange (Nasdaq)

The Nasdaq Stock Exchange was the world’s first technology-rooted electronic stock trading platform. It was created by the National Association of Securities Dealers in 1971 and was approved by the SEC as an official US stock exchange in 2006. Since then, it has evolved and grown to be the second largest exchange in the world.

By contrast to the New York Stock Exchange, the Nasdaq is popular because of its intelligent and modern electronic trading system. Its listing fees are also lower than those on the NYSE. At present, most of the world’s technology giants, such as Apple, Google, Amazon, and Microsoft, are listed on Nasdaq.

3. The American Stock Exchange (AMEX)

The American Stock Exchange, “ASE” or “AMEX”, …again, not the finance company, is the only exchange where stocks, options, and derivatives can be traded simultaneously, and it’s the only exchange that caters to small and medium-sized companies.

Each of these three exchanges has, over time, developed its own characteristics:

In general, companies such as Coca-Cola and IBM that are listed on the NYSE tend to be long-established, large-scale, and stable companies, while fast-growing technology companies such as Meta, Apple, Google, and Amazon prefer the Nasdaq. In contrast, companies listed on the AMEX are generally smaller in size and market cap.

I think you should now have a good basic overview of the three main exchanges in the US markets.

In this second step, we’re going to talk about the three main indices of the US stock markets.

The Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 are the three main indices used to track the US stock markets.

What is the difference between these three indexes? That is the first question that every investor should ask in order to better understand the US stock markets:

1.The Dow Jones Industrial Average Index

The Dow Jones Industrial Average, launched in 1896, is the oldest of the three main stock indices and is one of the best-known in the world. The DJIA is comprised of 30 stocks, all of which are large-scale or well-known listed companies. Among them are Goldman Sachs, McDonald’s, Microsoft, and Boeing.

The DJIA was made to give investors a way to track the rise and fall of the stock market and to be an indicator of economic cycles. Given the technical approach at the time, the DJIA adopted a “price weighted” method. Simply put, the share prices of the component stocks are added together and then divided by the total number of stocks in the index (30).

Using the price-weighted method, the price of each component stock determines its weight in the index, so the trend of this index can easily be affected by the share prices of individual listed companies.

2. The S&P 500 Index

The S&P 500 was created in 1957 by S&P Dow Jones and is now widely regarded as the best index of the three with which to measure the US economy.

Because the component stocks of the S&P 500 include 505 diverse US-listed companies and related industries, it is considered a better indicator of overall changes in the market.

The S&P 500 uses a “float-adjusted weighted market cap” method which is based on the free-float market value of its component stocks. Positions are adjusted on a quarterly basis to ensure that the index is weighted towards stocks with the greatest liquidity and/or the highest market value.

The S&P 500 index covers a wider range of companies and industries, and its calculation method more accurately reflects the overall performance of the US stock markets. For this reason, it is often used by many investment funds as a performance comparison tool.

3.The NASDAQ 100 Index

The Nasdaq 100 was established in 1985 and is the “youngest” of the three indices that we’re looking at. The Nasdaq 100 covers 100 “non-financial stocks” listed on the Nasdaq, of which technology companies account for half.

In terms of calculating its value, the Nasdaq 100 also uses the “float-adjusted market cap weighted” method and a quarterly position adjustment in order to better reflect the trend of high-tech stocks in the US.

Currently, the top three components of the Nasdaq 100 Index are Apple, Microsoft, and Amazon, accounting for nearly 30% of the index weight; the top ten technology companies account for more than 50% of the total weight.

After mastering the use of these three main indices of US stocks, you will be better able to assess the trend in corresponding sectors according to the rise and fall of the different indexes.

The third step is to understand US stock market regulatory agencies.

There are numerous regulatory agencies that govern the US stock markets, but the SEC is one of the main institutions that, as an investor, you should know.

The US Securities and Exchange Commission, better known as the SEC, is an independent government agency funded by the US Congress. Its main task is to watch over the securities markets and make sure that stock exchanges, brokerage firms, listed companies, and investors follow government rules.

Simply put, the SEC regulates stock trading, and we can regard it as the “police” of the capital markets. It not only supervises listed companies but also oversees trading by insiders and investigates financial fraud in order to protect the legitimate rights and interests of investors.

The SEC has had many famous regulatory cases, such as:

In November 2013, the SEC charged SAC Capital with insider trading. SAC was a hedge fund founded by Steve Cohen who was, at the time, one of the richest people in the world and the “King of Short-term Trading” on Wall Street. SAC ultimately agreed to accept the penalty and pay a fine of $1.8 billion to settle the case, making it the largest fine ever paid in US history for insider trading.

Countless companies have been investigated and punished by the SEC. It plays an integral role in protecting investors, maintaining orderly markets, and promoting capital formation, making it a very important regulatory body.

So, I’ve introduced you to the three main exchanges, the three main indexes, and the primary regulatory body of the US stock markets. While having their charms, these exchanges and indices are actually not the most attractive places for US stock investors. The most attractive places are those listed companies that are in an absolute leading position in the global industry competition.

So, what are some of the Sectors in the US stock markets?

Most of the companies in the US stock market are concentrated in these four industries: information technology, energy, healthcare, and consumer staples.

The information technology industry includes sectors such as software and services, technology hardware and equipment, and semiconductors. There are many big players in this industry, such as Apple, Microsoft, Amazon, Google, and Nvidia.

The second industry is energy, which includes energy equipment and services, as well as oil, gas and consumable fuels. The star companies in this industry are Exxon Mobil, Chevron, and Shell.

Then there is healthcare. Sectors within the healthcare industry include healthcare equipment and services, pharmaceuticals, biotechnology, and life sciences. The star companies in this industry include some of the world’s leading medical giants, such as United Health, Johnson & Johnson, Pfizer, and Merck.

Finally, consumer staples include industries such as food and beverage, tobacco, and household and personal products. Well-known companies like Wal-Mart, Procter & Gamble, Coca-Cola, and Pepsi are some of the top companies in the essential consumer goods industry.

We see the products of these companies in all aspects of our daily lives. The products they develop are popular all over the world, making these companies attractive to investors.

That’s the end of today’s lesson. Let’s summarize the main points we covered today: (Mind Map)

1. The markets that US stocks are traded in.

2. The three main indices of the US stock markets.

3. US stock market regulators.

4. Companies in the US stock industry.

Thanks for taking part in today’s lesson. I hope you have a better understanding of the US stockmarkets. Before you go, I’ll leave you with this…

Roy R. Neuberger, the “godfather of mutual funds,” once said that success in investing is based on applying knowledge and experience. It’s a good idea to specialize and invest in areas where you already have specific knowledge.

Gaining an understanding of the stock markets before investing helps you build basic investment knowledge and is a must for every investor.

In these two lessons, we’ve completed the “Basic Introduction” chapter of the Introduction to US Stocks course. In the next lesson, we will dive into the “US Stock Practices” section of the US Stock  market.

See you in the next class!

NZ Disclaimer

This video is made for educational purpose only. It is neither financial advice nor recommendation on buying or disposing financial products. Stock investments carry risk, stock market can be volatile and risky, including risk of losing an amount in excess of your initial investment. This video does not consider your investment goal or objective, Tiger Brokers assumes no warranty or responsibility for the accuracy and completeness of the information. Past performance is not an indicator of future performance. Please read our risk disclosures and you may need to do your own research or seek professional advice before using the services of Tiger Brokers and making investment decisions. please visit https://www.tigerbrokers.nz/ for more information.