What Does it Mean When the Stock Market Is Down?

Stocks

Stocks are securities that entitle their bearer to ownership of a slice of a business. Each share of stock represents a percentage of the company that issued the stock. As these stocks are traded, their prices rise and fall, due to a number of factors. Generally, as demand for a stock increases, its price goes up; as demand declines, its price declines, too.

Indexes

There are thousands of stocks sold in the U.S. alone. As a means of identifying the general price trends of these stocks, financial analysts use indexes. These indexes take the price of a handful of different stocks and average them. When the price of an index rises, the market the index is tracking is said to go up. When the prices of the indexed stocks go down, the market is said to go down.

Causes

The level of an index can go down for various reasons. Generally, drops in price correspond to a drop a demand. Demand for stocks may fall for a number of reasons. For example, if investors believe the economy will slow and sales will fall, they may choose to sell their stocks. Or, a drop in inflation may cause prices to fall and the stock market to fall accordingly.

Considerations

In the U.S., stating that the stock market has gone down usually implies that the Dow Jones Industrial Average has declined. The Dow is an index of 30 major U.S.-based companies. These companies are relatively stable, so the movement of their stock prices is considered indicative of the general trend of prices for all stocks. However, in other countries, the term "stock market" may refer to other indexes. In addition, the stocks that compose this index occasionally change, making some comparisons of the level of the stock market difficult. This is particularly true over long periods of time, when inflation becomes a factor.