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What is the S&P 500?

You hear it in the news all the time:

“The S&P 500 is up a hundred points today.”

Or “The S&P 500 is in the red today.”

What exactly is the S&P 500?  Well first of all it stands for the Standard & Poor’s 500 Index.  Standard and Poor’s is an entity that provides credit ratings and indexes.  They’ve been around since 1860!

The 500 refers to the fact that the index is made up of 500 of the largest publicly traded companies in the United States.  The index is weighted according to their respective market capitalizations.  All those 500 companies’ stock valuations are combined together accordingly, and the end result is a single numeric price that reflects the value of the index.

As the stock prices of the constituent companies of the S&P 500 move, so does the value of the S&P 500.

So that’s the technical definition of the S&P 500.  But to put it in layman’s terms, the S&P 500 is a gauge of how the stock market as a whole is doing.  Since the S&P 500 is an index of 500 of the biggest companies in the stock market, it means that however the S&P 500 is doing can be considered a reflection of how the whole market is doing.

There are other indices that give a gauge of the market.  The most popular is probably the Dow Jones Industrial Average (DJIA).  Although it’s calculated differently than the S&P 500, most times those two indices are largely correlated.

Some people tend to look solely at the S&P 500 to gauge the stock market’s performance for the day, and some people look solely at the DJIA.  (And some look at both.)

So when someone says, “the market is down today,” it likely means that either the S&P 500 or the DJIA is down for the day.  The S&P 500 provides a measure of the how the stock market as a whole is performing.

Now if you want to learn to generate a profit trading the S&P 500, that’s a much bigger topic!  You can check out our guide on how to make money in the stock market to learn more.




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