When someone says "the market was up today," they almost always mean a stock market index. An index is a basket of stocks chosen by a set of rules, and its value moves as those stocks rise and fall. Indexes give investors a quick way to see how a whole market or sector is doing, and they are the foundation of index funds and ETFs.
The S&P 500
The S&P 500 tracks about 500 of the largest US public companies, chosen by a committee at S&P Dow Jones Indices. To be included, a company generally needs to be US-based, highly traded, large and profitable. Together these companies make up the large majority of the total value of the US stock market, which is why the S&P 500 is the most common benchmark for US stocks.
The index is weighted by market capitalization (adjusted for shares that are actually available to trade). Bigger companies count for more. That means a handful of the very largest companies can move the whole index on a given day. You can see the size of any company on its StockEngine stock page, and learn more in our guide to market capitalization.
The Dow Jones Industrial Average
The Dow is much older and much smaller: just 30 large, well-known US companies. Unlike the S&P 500, it is price-weighted. A stock with a higher share price has more influence than one with a lower share price, regardless of how big the company is. Because of this quirk and its small size, most professionals prefer the S&P 500 as a measure of the market, but the Dow is still widely quoted in the news.
The Nasdaq Composite and Nasdaq-100
The Nasdaq Composite includes nearly every stock listed on the Nasdaq exchange, several thousand companies. It leans heavily toward technology and growth companies. The Nasdaq-100 is a narrower index of the 100 largest non-financial companies on Nasdaq and is tracked by popular ETFs such as QQQ.
Other indexes worth knowing
- Russell 2000: about 2,000 small US companies, the standard benchmark for small caps.
- Total market indexes: cover nearly every US stock, large and small.
- Sector indexes: track one industry, such as technology, health care or energy.
- International indexes: track developed or emerging markets outside the US.
How to invest in an index
You can't buy an index directly, but you can buy a fund that holds the same stocks. Index mutual funds and exchange-traded funds (ETFs) aim to match the index's return minus a small annual fee, called the expense ratio. S&P 500 funds from major providers often charge just a few hundredths of a percent a year. See our guide to ETFs vs. mutual funds to decide which type suits you, and index funds vs. individual stocks for how to combine them.
Why indexes matter for stock pickers
Even if you buy individual stocks, an index is the yardstick for your results. If your portfolio returned 8% in a year when the S&P 500 returned 15%, a simple index fund would have done better. The free portfolio tracker compares your holdings against the S&P 500 so you can see how you're really doing.
This article is educational and not investment advice.
Frequently asked questions
How many companies are in the S&P 500?
About 500 of the largest US public companies. The exact number of stocks can be slightly higher because some companies have more than one class of shares in the index.
Can you buy the S&P 500 directly?
No, but you can buy an index fund or ETF that tracks it and holds the same companies.
What's the difference between the S&P 500 and the Dow?
The S&P 500 holds about 500 companies weighted by market value; the Dow holds 30 companies weighted by share price.
StockEngine articles are for education only and are not investment advice. Some links may be affiliate links.