There are some fundamental concepts in the financial market. These concepts, or theories, explain how the market works and why the market follows certain trends.

Some of the more common market concepts are the random walk theory, the efficient market theory, the bull market theory, the bear market theory, and the Elliot Wave theory. Why are there so many different concepts? One reason is because the market itself is so complicated. The market can be going up and going down at the same time, depending on what index is being looked at.

More Than One Index

When someone refers to “the market” or “the market index,” that person is usually talking about the Dow Jones Industrial Average, or the Dow. The Dow is the oldest market index and is home to the largest and most influential companies in the world. It is a price-weighted index, where the sum of the per-share price of each dividend is divided by the number of companies in the market.

The S&P 500 is made up of the 500 most widely traded stocks in the United States. About 70% of publicly traded U.S. companies are on this list, which provides the best indicator of the country’s stock movement. The NASDAQ index is for trading technology stocks and is a global market.

Concepts Everyone Should Know

There are general financial concepts that every potential investor should be aware of. The risk/return trade off is the balance between wanting the lowest possible risk with the highest possible return. Diversification spreads out a portfolio over a wide variety of investments, while lowering the risk of the investment. Another concept is dollar cost averaging, which means that a fixed dollar amount is invested on a regular schedule, no matter what the share price. Asset allocation divides assets, creating more diversity within the portfolio. The optimal portfolio concept shows the way for investors to maximize their investment returns at a risk level most comfortable to each individual. The concept of capital asset price modeling describes the relationship between risk and return. It also acts as a model for pricing risky securities.