Finances Q&A: Stock Market and "Laddering" CDs
- Friday, September 28, 2012
What is the Dow Jones Industrial Average?
“The Dow,” also abbreviated as DJIA, is one of many stock market indexes.
If you hear someone say, “The market was up 20 points today,” it’s likely that person is referring to the Dow Jones Industrial Average index. As is customary, it is the most quoted index in the news.
This index is comprised of 30 industrial companies. Since the companies are quite large and well known among the industries, they are more commonly referred to as “blue chips.”
The Dow began in 1896 with 12 companies. Only General Electric remains of the original 12. Some companies that have been added in the last two decades are Cisco Systems, Hewlett-Packard, Johnson & Johnson, Wal-Mart, Home Depot, Intel Corp., Microsoft, Pfizer Inc. and Verizon.
The DJIA doesn’t statistically represent the entire stock market. It doesn’t include transportation or utilities companies, according to The Consumer Reports Money Book.
Additionally, the service sector is underweighted.
Investors who want to compare their investment performance against a much wider market usually choose a broader index, typically the Standard & Poor’s 500. This index is made up of 500 stocks, also comprised of companies that are large and well-established.
What does it mean to “ladder” CDs?
This is a strategy of investing that is used if you expect interest rates to rise. Laddering CDs offers flexibility in saving money.
Let’s say you want to keep $20,000 of your longer-term funds in CDs, but you’ve also noticed the rates are low. If you don’t want the full amount to be locked into a lower rate for a long time, you can divide the total amount into several CDs with different maturing dates.
Rather than place the entire dollar amount in one longer-term CD, you can place $5,000 in a one-year CD, $5,000 in a two-year CD, and so forth. As each CD matures, you can reinvest in a new CD, one that may have a higher interest rate.
Copyright 2012 Deborah Nayrocker. All rights reserved. Permission to reprint required.
Publication date: September 28, 2012
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