For beginners, the S&P 500 may seem like an abstract term bandied about by investors, but its importance should not be underestimated
Turn on any financial television network and you’ll almost certainly hear someone mention “The S&P” within 5 minutes.
You’ll also hear professional investors talk about “beating the market.”
So what are they talking about?
The S&P 500, or Standard & Poor’s 500, is a selection (aka index) of 500 stocks that are a microcosm of the entire stock market. It is the most commonly followed index and is considered a good indicator of the health of the U.S. economy.
It’s been around since 1923, but the 500 companies have changed since then.
You’ll often hear people talking about “beating the market.” “The market” in this case means the S&P 500. For example, if the S&P rose 13% in one year, but your stock portfolio went up 17% that same year, you beat the market by 4%. Good job!
Beating the market is seen as the holy grail of stock investing.
There are plenty of other indexes that track various sections of the stock market both in the States and worldwide. The Dow Jones Industrial Average is similar to the S&P 500 except it focusses on 30 companies. The FTSE 100 tracks the UK stock market, while the Nikkei 250 tracks Japan.
There are indexes for specific industries and even very specialized indexes to track things like “ethical companies.”
What is the S&P 500?
- The Standard & Poor’s 500 is a selection of 500 stocks that represent the entire stock market.
- When people talk about “beating the market,” the market is The S&P 500.
- If the S&P 500 goes up 10% and your portfolio goes up 13%, you beat the market by 3%.
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