A Simple Explanation of Stock Exchanges, the Dow Jones, and the S&P500

PartisanIssues.com does not spend a lot of time on the technicalities of publicly traded stocks but recently we received more than a few questions that required us to provide a simple explanation of the various exchanges.

Note that the terms Stock Market, Stock Exchange, Market, and Exchange are used interchangeably.

The stock market question that pushed us over the edge into writing this article had to do with confusion over the “S&P 500 Stock Market”.  To get to the point, there is no S&P Stock Market.

What is a Stock Exchange in Simple Terms?

A stock market is a physical place where shares of publicly traded companies are bought and sold.

The floor where “traders” work is called a “pit” and when you make a request to buy or sell stock those traders make it happen.  Well, that used to be the way it worked.  Now almost all trading on major stock exchanges is handled by computers, but if you have a large enough trade (and I mean millions of dollars) you might be have a human trader try to negotiate the sale for you… but that really is a mostly dead way of trading.

What Is The S&P 500 In Simple Terms?

The Standard and Poors 500 is a grouping of the 500 largest companies in the United States.  That grouping is not tied to just one stock exchange.  The companies in “The S&P” are listed on the NYSE, Nasdaq, Dow and more.  In fact, you might be surprised to find that the companies included in the S&P 500 are not automatically decided on based on their size.  They are chosen by the same group of people that decide who is on the Dow Jones 30 Industrial Index.

You and I cannot buy any part of the S&P 500 directly.  Instead you can buy an “index” that matches the S&P500 from one of a dozen companies.  That is why many investors own SPDR S&P 500 ETF aka SPY from State Street.  (… and no, they did not pay us for that reference).

In case you are wondering just how big the top 500 US companies really are, the answer is very big.  Adding up the value of the companies in the S&P 500 accounts for 80% of all US stocks.  It is so big that the S&P 500 is a synonym for “the market” and that is why some people wrongly think that there is an S&P500 Stock Market.

Where is the Dow Jones?

Much like the S&P 500 the Dow Jones is not a stock market.  Dow Jones is just a company that groups stock together from large US companies and those companies are listed on many different US stock exchanges.

Their most famous grouping is called the Dow Jones Industrial Index (DJIA) which is a combination of 30 big US companies. To be clear,  those 30 companies do NOT have to be the largest companies.  In fact, Google (Alphabet) and Amazon are not included in the index because the silly way that the DJIA is calculated would result in the index being even less representative of “the market” than it already is.

Most investment professionals think the DJ Index is interesting because it has been around for 125 years but does not provide any real insight into how the market is performing.  Even the name is outdated as the companies on the DJIA list are no longer required to be “Industrial”.

What Are The Differences Between Major Stock Markets?

In this table we provide you with the key metrics on each of the worlds largest 11 stock exchanges: