A commonly used phrase throughout the financial media is “the market”. While it seems like “The Market” and “The Stock Market” are the same thing, they actually share little in common and represent two entirely different things. Because of this common misunderstanding, many novice investors often can interpret news incorrectly. So I’m going to clearly define the two and explain the difference.
“The Stock Market”
|This phrase refers to all of the individuals who make up the investing industry. Private investors, Hedge Funds, Mutual Funds, etc. all make up what is referred to as “The Market”. Which direction stock prices go to is determined by the aggregate opinion of “the market”.||This literally refers to the entity in which shares are issued and exchanged, known as the Stock Market. Sometimes referred to the equity market as well.|
As an example: A financial news reporter states “We’re seeing prices head higer as the market believes the Federal Reserve will help ease lending issues. On the whole however the Stock Market has experienced some wild volatility as the market has struggled to find direction”.
In this example, the financial news reporter is saying that stock prices are rising because the majority opinion (“the market”) is that the Federal Reserve’s actions will help the Stock Market. In the second sentence, the reporter is stating that the stock market has experienced volatility because the majority opinion (“the market”) continued to switch it’s mind on whether to be positive or negative about the future of the Stock Market.
But why does the majority opinion matter?
The majority opinion matters because it is a collective reflection on whether we want to be buying or selling stocks. This goes back to basic economics; More buyers than sellers will cause prices to go higher, and more sellers than buyers will cause prices to go lower. So the majority opinion matters because it determines which direction stock prices will go.