By Danielle Arlotta, CFP®
You’ve probably heard of the terms Dow Jones, S&P 500, and Nasdaq before, but what do they actually mean? These are three of the most widely followed stock market indexes. A market index is a way to measure the performance of a group of stocks, or other assets such as bonds. We follow indexes to get an idea of how certain segments of the market are performing at a glance.
- Dow Jones Industrial Average: Usually referred to as the Dow, this index is made up of 30 blue chip stocks.
- S&P 500: This index tracks the top 500 companies in the US.
- Nasdaq: The Nasdaq consists of over 2,500 common stocks, all of which are traded on the Nasdaq stock exchange. It is heavily weighted in technology stocks and comprises both US and international companies.
These three indexes represent a small section of the global stock market, and there is some overlap among them. For example, Apple and Amazon are listed in all three. What that means for us is that these three indexes are just a glimpse into a segment of the market, not the market as a whole.
Key terms to know:
- Blue Chip Stocks: A blue chip is a nationally or internationally recognized, well-established, and financially sound company that’s publicly traded. Blue chips generally sell high-quality, widely accepted products and services.
- Points: We use points to measure the dollar amount an asset gained or lost. One point is equivalent to $1.
- Correction: There’s not a hard-and-fast rule for a correction. Most people consider a correction to be a downturn in a stock index by at least 10% from a recent high.
- Bear Market: Generally a bear market is defined as a decline in indexes by 20% or more. This usually means that investors are pulling back and have lost confidence in the markets.
How does this all translate to the real world? You hear that the Dow dropped 400 points yesterday, that sounds like a lot, $400. But, that is only about a 1% loss since the Dow is at about 40,000. Hearing about gains and losses in stock indexes is a normal part of the news cycle. Those gains and losses will look differently in your portfolio since you are not invested exactly the same as the indexes. We caution clients not to panic when listening to market news, especially if we are investing for the long term.