Investing 101 - the stock market

The Stock Market

The stock market allows buyers and sellers to trade stocks listed on a stock exchange. This is where shares in corporations are issued and traded. Stock markets serve two main functions. One is for corporations because the stock market provides access to capital (typically cash). Corporations issue stock in order to raise money for business endeavors, such as financing a major project. The second function is for shareholders because the stock market allows individuals to participate in a company’s growth and convert their stock into cash. There are a number of stock market indexes, a couple of them are highlighted below.

Dow Jones Industrial Average

Also known as the Dow Jones, this is a stock market index that measures the stock performance of 30 large companies listed on stock exchanges in the United States.
Historical chart of the Dow Jones Industrial Average

S&P 500

Also known as the S&P, this is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.

Source: Investopedia

Dow Jones vs S&P 500

Dow Jones

Started in 1896, the Dow is America’s original stock index.

The criteria for a company to get on the Dow is a bit vague. The companies are all leaders in their industries and are all very large. Companies are not added to it or removed from it lightly. If the index comes up for review, the members of the committee may replace more than one company at a time.

Companies in the Dow Jones

  • Home Depot
  • JP Morgan Chase & Co
  • McDonald’s
  • Coca-Cola Co

The Dow is affected only by changes in the stock prices (due to the Dow being price-weighted), so companies with a higher share price or a more extreme price movement have a greater effect on the Dow.

S&P 500

Started in 1957, the S&P tracks large publicly traded American stocks.

The stocks in this index are from all sectors of the economy and similar to the Dow, they are selected by a committee. To be selected, stocks must have a market cap of $8.2 billion or more (as of 2019), have a public float of at least 50%, have positive earnings for the most recent four quarters, and have adequate liquidity as measured by price and volume.

Companies in the S&P 500

  • Apple
  • Microsoft
  • Amazon
  • AT&T

Different from the Dow, stocks in the S&P are weighted by their market value rather than their stock prices. The S&P attempts to ensure that 10% change in a $20 stock will affect the index in the same way as a 10% change in a $50 stock will.

Conclusion

Both of these indexes are used by investors to determine the general trend of the U.S. stock market but the S&P 500 is more encompassing, as it is based on a larger sample of total U.S. stocks.
the-stock-market-noun_stock-market_398893