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Everywhere you turn, media people are talking about “the Dow,” “the Fed” or the “S&P 500.” What do these terms mean? And, more importantly, what impact do they have on your wallet?
Here’s a brief explanation:
Dow Jones Industrial Average (DJIA or “the Dow”)
The Dow is an index used to measure price changes (ups and downs) in the stock market, using the average selling prices of 30 of the largest and most widely held stocks in the U.S., such as General Motors, Home Depot, Coca-Cola and the Walt Disney Company.
Standard & Poor’s 500 (S&P 500)
The S&P 500 reflects price changes (or “performance”) of stocks for 500 large companies from various industries. Most are U.S. companies, though a handful are not. Because of the greater number of stocks it tracks, the S&P 500 provides a broader view of how the stock market is performing than the Dow.
The prime rate (or simply, “prime”) is the interest rate banks charge their best (lowest risk) commercial customers. Many types of consumer financing, such as home equity loans and credit cards, are indexed to prime, which means that when prime goes up or down, so do these lending rates.
Federal Reserve (“The Fed”)
The Fed is the central banking system in the U.S., and tries to control the size of the money supply. Adding or subtracting money from the supply has the effect of raising or lowering the federal funds rate—the rate banks charge each other for overnight loans. This, in turn, raises or lowers the interest rates, including the prime rate that banks charge their customers.
Treasury securities are government bonds that are issued by the United States Department of the Treasury. The T-bill is known as a short-term Treasury security because it matures (reaches full value) in six months or less. T-notes have an original maturity of two, five or 10 years. Certain types of financing, such as Adjustable Rate Mortgages (ARMs), are indexed to (or move up and down with) the rates of these Treasury securities.