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Essential Option Strategies by J. Kinahan

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Chapter 2First Days of Trading

I am interested in the stock market because it really is a fascinating and exciting world to me. Each day, millions of investors make decisions to buy or sell shares of companies based on the latest news and information. Whether it's economic data, earnings, a merger story, geopolitical headlines, or some other event, it's often reflected in the stock market before it even makes the rounds in the news outlets. It's truly an amazing and efficient process.

While stock prices can react rapidly to incoming information, trends often develop over time as well. In bull markets, for instance, stocks are moving broadly higher, and investor sentiment is typically upbeat. In bear markets, shares trend lower, and the overall mood can sour. In addition, there are periods of quiet and uneventful trading, while at other times prices swing wildly in volatile fashion.

But when we say stock market, what exactly do we mean, and how do we gauge it from one day to the next? Is it the New York Stock Exchange? Are we referring to the Dow Jones Industrial Average or the NASDAQ? How do we measure the stock market, track its performance from one day to the next, and trade it? Those questions are answered in this chapter. Let's first begin with a brief history of stock market averages and then focus our attention on the key barometer the pros use: the S&P 500 Index.

Brief History of Stock Market Averages

In 1896, Charles Dow computed the average share price of twelve leading ...

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