What Is the Market? (Will the Real Market Please Stand Up?)

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What Is the Market? (Will the Real Market Please Stand Up?)

In order to determine whether a market is efficient, we need to know what the "market" really is. When investors talk about beating the market, they are usually referring to one of the major market indexes, such as the S&P 500. An index is a statistical composite that helps you track a particular stock or fund in comparison to an overall market.

When they refer to an "efficient market," investors must decide whether they are talking about the market as a whole (all the indexes together) or segments of it. Indexes only represent segments of the market, not the entire market itself.

It’s also the sectors

In addition to covering the typical asset classes such as stocks, bonds, and cash, the entire "market" also includes sub-asset categories. Sub-asset categories are usually broken down by capitalization (the amount of a company’s invested capital) or industry sector. For example, stocks can be broken down by small-cap or large-cap size or by sectors, such as foreign or pharmaceutical stocks. Bonds can be broken down into municipal bonds, junk bonds, and other types.

What indicators do we use?

The most common market indexes and averages include the following:

• The Dow Jones Industrial Average lists the stock prices of 30 major companies selected by the editors of the Wall Street Journal. These companies make up 15–20 percent of the total stock market value of the New York Stock Exchange.
• The NASDAQ Composite Index covers a broad range of industries (over 2,500 companies) weighted by market value.
• Standard & Poor’s 500 tracks a select group of 500 of the largest company stocks in the United States.
• The New York Stock Exchange Composite (NYSE Composite) keeps track of more than 2,000 stocks traded on the New York Stock Exchange, with strong emphasis on larger stocks.
• The NYSE American (formerly the American Stock Exchange) is weighted by capitalization, and it includes many smaller firms and mid-size growth companies, including high-technology stocks.
• The Wilshire 5000 Index covers more than 5,000 stocks, including those on the NYSE, AMEX, and NASDAQ.

Any of these indexes can be used to see how your stock price is holding up against a much larger group of stocks. But to determine whether "the market" is efficient as a whole, you will have to closely examine the results of all the indexes together, plus any sub-asset categories not covered by these indexes.