Dow Jones and S&P 500 | Index Investing

The Dow Jones and S&P 500 are probably the most followed stock indices in the world. It's probably the one you see most often quoted on the major financial news outlets.

These two indices comprise leading companies across all sectors that is used as indicators of the US stock market and economy as a whole.

The Dow Jones Industrial Average is made up of 30 blue chip companies. Blue chip companies are basically gigantic companies.

The reason this is a good indicator of the economy is because blue chip companies are assumed to be the leaders in their industry and the economy as a whole.

The S&P 500 composite index is the aggregate price of the 500 stocks that make up the index. That means the price of the stocks are all added up together and that is how you come up with the number that you see on CNBC. Here is how they are used and why may be good investment advice to those uninterested in the stock market.

The main reason indices and other economic indicators like interest rates, employment and exports are used is because it is impossible to measure the health of the economy in one single report.

So statistics and data from different sectors of the economy are used to help build a larger picture of how the economy is doing overall.  This is how indices work.

The Dow Jones and S&P 500 indices comprise influential companies that are indicators of how the economy is doing.  The economy is made up of much more than these 530 companies, but we can be reliably certain that they represent enough activity in our economy for it to tell us a story of how it's doing.

Simply put, it's similar to when there is a major factory that is the central catalyst for the economy of a small town. The factory provides jobs, which in turn produce income which the factory workers turn around and spend on goods and services for smaller businesses in the town.

When the factory is doing well, so is the town as a whole because it affects every part of the society there. When it's not doing well and they are laying off workers, everyone feels it, from the corner store to the local police that rely on tax dollars from the factory to operate.

In the same way but on a much larger scale, the Dow Jones and S&P 500 indices are indicators for how the overall economy is doing. This is true even though the economy has many more components to it than the companies that make up the Dow Jones and S&P 500 indices.

Some investors use the Dow Jones index fund and S&P 500 index fund to trade and invest their money. Some do it through futures and options. But the safer way to do it is through index funds. This is why some investors go this route.  This is also why many financial advisor offer investment advice based on index funds.

Index funds simply buy stocks in whatever index they are following. This cuts down on risk because the Dow Jones and S&P 500 indices have gone up over time.

Index investing also cuts down considerably on management fees because it is considered a passively managed fund. Money managers don't have to track down and analyze different stocks. They simply plop in the stocks in the index to invest their money in.

A Dow Jones Index Fund invests in the 30 companies that are part of the DJIA. This is considered to be a very safe investment fund because the Dow Jones has proven itself to grow over time. It has also been proven to beat most of the mutual funds and actively managed funds in the industry over time.

A S&P 500 Index Fund is also a safe and cheap mode of investing. Some like the S&P 500 better because it is composed of more leading companies. Many analysts consider the S&P 500 as a better indicator of economic health than the Dow Jones.