The S&P 500 stock index topped 5,000 for the first time on Feb. 9, 2024, exciting some investors and garnering a flurry of media coverage. The Conversation asked Alexander Kurov, a financial markets scholar, to explain what stock indexes are and to say whether this kind of milestone is a big deal or not.
What are stock indexes?
- When prices rise or fall overall for the shares of those companies, so do stock indexes.
- The number of stocks in those baskets varies, as does the system for how this mix of shares gets updated.
- The Dow Jones Industrial Average, also known as the Dow, includes shares in the 30 U.S. companies with the largest market capitalization – meaning the total value of all the stock belonging to shareholders.
- The Nasdaq composite tracks performance of more than 2,500 stocks listed on the Nasdaq stock exchange.
- The S&P 500 index was introduced in 1957 because many investors wanted an option that was more representative of the overall U.S. stock market.
Why are there so many?
- Most of them, including the Nasdaq composite and the S&P 500, are value-weighted.
- That means stocks with larger market values account for a larger share of the index’s performance.
Do these milestones matter?
- The DJIA first reached 1,000 in November 1972, and it crossed the 10,000 mark on March 29, 1999.
- Investors and the media will treat the new record set when it gets to another round number – 40,000 – as a milestone.
- Because there’s a lot of randomness in financial markets, the significance of round-number milestones is mostly psychological.
- Index milestones matter to the extent they pique investors’ attention and boost market sentiment.
- Many economists believe that the consumption boost that arises in response to a buoyant stock market can make the economy stronger.
Is there a best stock index to follow?
- However, because it is value-weighted, it’s heavily influenced by only seven stocks with very large market values.
- But if you check out several stock indexes rather than just one, you’ll get a good sense of how the market is doing.
- But the market rebounded, with stock indexes hitting new milestones and notching new highs by the end of that year.
- This is why I believe advice from the immensely successful investor and fan of stock index funds Warren Buffett is worth heeding.
Alexander Kurov does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.