What is the Dow or S&P 500 and why should I care?
Ever heard someone say “Just buy the S&P” or “Smart investors always choose the Dogs of the Dow”.
Have you ever been totally confused about what they are talking about?
It’s ok, I was too when I first started. And that is normal. Everyone has to start from zero if they want to make it to a million.
Very simply, the S & P 500 stands for “Standard and Poor’s 500”. It is an index reflecting the value of the 500 largest companies in the United States. Alternatively, the Dow stands for “The Dow Jones Industrial Average or DJIA”. It is made up of 30 companies listed on the New York Stock Exchange with the highest stock price.
Ok, So what?
The importance is not in their definition, it is what these two things represent. The Dow and the S&P 500 represent the “Overall Health of the United States Economy”. That is why everyone cares.
For example, in 2008 when the housing bubble burst and we had a world-wide financial crisis, the Dow and the S&P 500 were indicators of how bad the financial crisis was. Alternatively, today in 2018, the Dow and S&P 500 are at all-time highs and everyone believes the economy is great!
These two things are essentially a happiness meter of the economy. If they are up, then businesses are happy and consumers are happy. If the two indexes are down, then no one is happy.
This of course is an over-simplified explanation of the S&P 500 and the Dow, but in essence they are just happiness meters.
There is one more reason why people care. That is because you can actually buy or sell the S&P 500 or Dow.
How is it possible to buy an index?
Easy, well…kind of. You can’t actually buy the index, but a financial company can purchase shares and put them into a mutual fund that accurately reflect what is in the index.
Once the financial company has set that up, then you as an investor can buy shares of the mutual fund that they set up. Just type “VOO”, “SPY”, or “DIA” into the Google search bar and you’ll see that you can actually buy and sell the index.
Buying and selling the S&P 500 or Dow is important because it is easy for people who don’t want to get involved in the stock market but still want to invest. Picking stocks can be difficult if you don’t know what you are doing. But if you still want to invest, you can buy “VOO” or “DIA” so you can still gain from the overall increase in the US Economy.
If you are interested in learning to choose stocks that will increase a lot over time, then you can check out my “Stock Picker” that I created for people who are just getting started. Or if you don’t really want to learn, but just want to gain money slowly over time, then I suggest opening an account with Vanguard and purchasing “VOO”. Even if you don’t purchase a lot, make sure you purchase shares every month and treat it like a savings account. That will ensure that you will be rich one day!