If you are someone who tends not to pay attention to the economy the words Dow Jones and S&P 500 may not mean anything to you. However, if you overhear or even dabble in conversation about the economy or stock market these terms are almost guaranteed to come up. Hopefully this article will help you grasp a better understanding of what they are and why you hear about them.Â
Dow Jones and S&P 500 are both indexes that can give us intel about how well the U.S stock market is doing. An index tracks the performance of a smaller group of stocks and bonds instead of looking at the entire market. Essentially indexes are the sparknotes of the stock market and the stock market is the book you don’t have time to read.Â
Now why do we need two indexes and what do they mean? Well there are actually thousands of indexes but the Dow Jones and S&P 500 are two the most notable. Despite this they are very different.Â
The Dow Jones Industrial Average is the second oldest index in the U.S market. This index tracks 30 publicly owned blue chip companies. These are companies that tend to be stable and reliable and withstand good and bad economic conditions, like Walmart and Coca-Cola. This term is related to poker, as blue chips tend to hold the most monetary value.
This index is also price-weighted, meaning that companies with higher stock prices hold more influence over the Dow’s performance despite company size. So, if you hear that the Dow is down 1,000 points this can indicate economic struggle or geopolitical turmoil. However, the Dow is often criticized for its small sample size and unusual weighting system.Â
In other words if the Dow Jones was tracking TikTokers they would follow the 30 most popular influencers who have been famous for a long time and haven’t been cancelled or fallen off. The influencers would be weighted by how much money they make on sponsored posts rather than the overall content they produce, and if all of their views were down this could indicate issues with all of TikTok.Â
Now for the S&P 500. The S&P 500 tracks around 500 of the largest publicly traded companies in the U.S. It is considered the most reliable tell of the stock market and economies health. Unlike the Dow Jones, the S&P uses market-capped weighting and covers all 11 major sectors. Market-capped weighting meaning, more influence is given to larger companies and not based on stock price, and the 11 major sectors are technology, financials, healthcare, consumer directory (luxury items), communication services, industrials, consumer staples, energy, utilities, real estate and materials. Thus, making the S&P 500 more diverse.Â
Now if the S&P 500 was following TikTokers instead of companies they would be following the top 500 creators on the app that cover many different topics. These creators cannot be one hit wonders using a trending sound, they need a large market cap (amount of followers and influence) and they have to prove that they are making a lot of money (be a part creator reward program). Given that the S&P is market-caped weighted, if Alix Earle loses 10 million followers it will shift drastically and indicate that the app is not doing well. However, if 200 smaller creators start to flop it will barely change.Â
In conclusion, both indexes are great ways to gauge the health of the stock market, and if you hear that the “Dow is up 100 points” this can be a good sign or if the “S&P is down 200 points” this can be bad. However, these indexes don’t always gauge the long term health of the economy, as the stock market is changing every minute due to many different variables. These indexes just help give us a brief overview of how the stock market is doing at the moment.