It can be daunting to sit down and try to learn even just the basics about the stock market—for example, it might be downright revelatory to learn that there is no all-encompassing “stock market,” but instead many stock exchanges and markets. Rather than trying to absorb everything in one go, a good crash course that can help newcomers wanting to be better informed about the topic side-step a lot of minutiae of the alphabet soup (NASDAQ, NYSE, DJIA, etc.) starts with a good look at the S&P 500.
For further context, here’s SoFi’s guide on how stock exchanges work in general.
Who is Standard & Poor’s Anyway?
Standard & Poor’s is a financial services company specializing in conducting research and analysis that helps investors recognize opportunities and make better, more informed decisions. The company’s roots date back to 1860 with the publication of a book of financial information on the US railroad industry—which is only worth mentioning and being aware of in the 21st century as an indication of how steeped the company is in its mission to help provide transparency into the world of investing.
A History of the S&P 500
The S&P 500 was first introduced in 1957, the result of ongoing and gradual expansions to S&P’s previous, comparatively more limited stock indexes—like 1926’s roll-out of a daily round-up of 90 stocks. Its emergence in 1957, according to S&P’s official history, was made possible by “an electronic calculation method developed by Boston-based Melpar, Inc., that allowed S&P to perform index calculations much more efficiently than before.” And while S&P reportedly could have tracked every stock on the New York Stock Exchange, it was decided to instead limit its scope to stocks that account for over 90% of total US market value. (When it began, the S&P 500 consisted of 425 industrial companies, 25 railroad companies, and 50 utility companies.)
A big reason why the S&P 500 is today widely considered by many investors to be perhaps the single best overall indicator of how large US stocks are performing is because of, as the name suggests, how comprehensive this index is. The S&P 500 is comprised of 500 large-cap stocks (meaning a company valued at being worth more than $10 billion) representing the leading industries of the US economy, including everything from healthcare and information technology to utilities and many more. The S&P 500 tracks both the liquidity (how easily their stock can be purchased) and also the risk associated with those companies.
Altogether, the S&P 500 gives an overview of how larger companies are performing, and as a result how many investor portfolios are performing as well. Through mutual funds or exchange-traded funds, it’s possible to participate as an investor in these large companies. SoFi’s financial planners can advise interested investors on what might make sense for your situation.
While on paper the S&P 500 is by a great measure more comprehensive than the Dow Jones Industrial Average (which measures the stock performance of only 30 large companies listed on stock exchanges), it should also be noted that a handful of the S&P 500 either are incorporated in or have headquarters located in other countries, like manufacturer Trane Technologies (Ireland) or oil and gas company TechnipFMC (England). In other words, while the S&P 500 can give a solid overview of how large American companies are performing, it’s also an international index. To learn more about index investing and building a portfolio bigger than what might be right in your backyard, this overview on index investing is worth a look.
S&P 500 Earnings History
A quick look at the S&P 500 price history’s biggest milestones only further bolsters its potential usefulness as a market indicator for investment decisions. To start with the bummer news and get it out of the way first, consider some of the lowest performances tracked and posted by the S&P 500: The stock market crash of 2008, for example, saw the market close at 903.25, with a point loss of 565.10 and overall being down 38.49%. The stock market crash of 1931, part of the Great Depression, was even worse, with Standard & Poor’s clocking a closing level of 8.12, a point loss of 7.22 and the market being down 47.07%.
In contrast, and maybe not a surprise, when the United States pulled out of the Great Depression in 1933 stands among some of the biggest high points in this country’s earnings history: That year S&P clocked the market surge ahead by 46.59%, closing at 10.10 and a point increase of 3.21. More recently, March 13, 2020 saw the market close at a record closing level of 2,711.02, representing a 230.38 point change and a 9.29% jump.
As that recent date and activity suggests, while things are getting more volatile nationwide with COVID-19 with massive layoffs, unemployment claims, and uncertainty about when the economy will reopen, the markets are being shaken up quite a bit: Just 10 days after that previously cited higher point, on March 23, 2020 the S&P 500 closed at 2,237.4. On April 17, 2020 it had already bumped back up to 2,874.56.
But if there’s anything that can make eyes gloss over more than alphabet soup it’s a wall of numbers. All these figures really mean is that the S&P 500 is regarded as one of the leading authorities in gauging how the US is doing financially.
SoFi has a team of credentialed financial advisors available to answer investors’ questions and help them reach their goals. Whether they’re interested in choosing individual stocks or trying an index fund, it’s important for investors to keep track of their portfolio and current market trends.
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