Indexes are just bunches of different stocks that are lumped together to represent a particular part of the market. The Dow consists of large companies from a fairly broad range of industries. The S&P and Nasdaq are similarly broad. Think of these as averages that tell a bit about how the Market is doing.

Within each index, the individual stocks that make up the index are being traded separately. Some go up, some go down, the index may not move much at all. Now, big movements can mean all sorts of things. Right now hot topics are finance, energy, automotive. These are three huge industries that are facing some difficult times. Right now it would not be surprising to see big drops in these industries, and the index as well.

As for the indexes following each other, it gets more interesting. There are thousands of different ways to invest money based on market conditions. Large mutual funds and brokerage services make large transactions based on their opinion of how the market is moving. There is usually some amount of commonality between these large companies, so they tend to all make the same sort of huge transactions. Because they are involved in a broad range of industries, their large transactions influence the indexes. If there is a lot of common opinion followed by common actions from the big investors, the indexes will move somewhat together.

Example: News that the middle east is going to cut oil production usually means that the price of oil is going to go up. This probably means that oil companies are going to make more money. At the same time, higher oil prices means that the cost of transporting stuff is going to to up. Oil company stocks may go up, big investors who believe this will start to buy oil stocks. This will make the energy portion of an index increase. Transportation companies may not make as much profit with higher fuel costs, investors who agree, may start to sell off transportation company stocks. This may cause the transportation portion of the indexes to go down.


That's my nutshell explanation. I have a link below to a group that does a much better job of explaining finance is easy to understand terms.
Source(s):
www.fool.com

they are a pay service now, but still have a lot of good free information. they also publish good, easy to follow, books.


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