In Australian, the state of the stock market is judged by the S&P/ASX 200 Composite Index, which recently replaced the All Ordinaries Index, normally known as the All Ords. The American equivalent of the S&P/ASX 200 Composite Index is the Dow Jones Index.
The S&P/ASX 200 Composite Index is a measure of 200 of the largest and most frequently traded stocks on the Australian share market. Measuring their rise and fall allows us to have a fairly accurate reading of how the Australian market as a whole is faring.
Each major share market around the world has its own index to help investors rate how the market is faring, plus a number of sub indices such as the industrial index, a gold index or a resources index, that measure particular sectors.
Definite forces shape share prices. An understanding of these forces can do more than help you formulate an investment strategy - it will also help you see how events can shape everything from the unemployment rate to interest rates.
Following are a few of the factors that affect the price of a share:
* Supply and demand
* A company's financial health
* The industry's financial health
* Economic trends
And always remember, two of the main factors that drive the share market are greed and fear. This is sometimes referred to as the Lemming Syndrome - when the market has a hiccup, all the inexperienced traders nose-dive off the cliff after each other in panic. And when a stock is hot, all the Lemmings buy it up in their droves, regardless of how expensive it becomes.
Smart and experienced traders don't follow the Lemmings. They have their share trading strategy that they stick to, and they also know that a falling market can sometimes be the best time to make money.
Of course, no one is immune to arrogance and stupidity, so there are no perfect strategies because there are no perfect people. All you can hope for is to do the best you can within your capabilities. That's why a solid trading education is so vital - without it, you are operating on hunches and intuition and that's almost certainly a guarantee of failure.
Here's a fun exercise for you to try. Monitor the share market results and see what happens when major events occur, such as natural disasters, or financial successes for major companies, or strong economic growth. You can usually draw a graph showing a strong correlation between events in the world and how they effect the share market - it's quite canny.
In fact, if you like your history and are up for some research, go back and look at old share market results and see where they rise or fall as a result of external forces. Wars, famine, corruption and so forth can all be tied into market fluctuations.
At the end of the day, the lesson to learn is that the share market is driven by people, and as I mentioned above, people are not perfect. Greed and fear can effect any and all of us at some stage. In our examples, you just get to see it played out over a larger scale. Really makes you think about how 'funny' we human beings are...
Don't be a Lemming! Get yourself a solid trading education, develop a solid trading strategy, and don't let your ego run away from you, and your chances of success increase dramatically compared to the Lemmings...
Jon Lynch is Marketing Manager of the Capital Intelligence Group of companies, including HomeTrader - Australia's leading share trading education centres. We focus on teaching you how to create wealth through the share/stock market using a customised trading plan or system that is right for you, your situation and your goals. Visit our website and register for your free introductory DVD "Learn To Make Money On The Stock Market" at http://www.learnshares.com.au