What Is "The Market"? The Dow, the S&P 500, and the Index Bet You Didn't Choose

I'm Andy Temte and welcome to Money Lessons! Join me every Saturday morning for bite-sized lessons that are designed to improve financial literacy around the world. Today is June 27, 2026.

Last week we went under the hood of a trading app and found the hidden machinery beneath it — the clearinghouses and the settlement system that quietly decide what you can and cannot do. Today I want to look at something we have leaned on in nearly every episode without fully explaining it. We say "the market" went up, or had a rough week. But what is "the market," exactly? Today we will define it, see where its famous measures come from, and ask what they really tell you.

The Market as a Measuring Stick

There is no single thing called "the market." There are thousands of companies whose shares trade every day. So when someone says the market went up, they really mean that a measure of those companies went up. That metric is called an index. An index takes a basket of stocks and condenses their combined movement into a single figure.

We met the very first index back in our November 1st episode. A financial editor named Charles Dow built it in 1884, tracking a handful of companies, most of them railroads. Before Dow, there was no clean way to talk about all those stocks at once; his index let people say "the market" and mean something measurable. An index also becomes a benchmark — a yardstick to measure the performance of an investment or portfolio against.

The Dow: A Measure Built on Price

That first average grew into the Dow Jones Industrial Average — the Dow, for short — still one of the numbers you hear most often. The Dow follows just thirty large, well-known American companies. And here is its first quirk: it is built on share price. The higher a company's share price, the more it moves the Dow, regardless of how big the company is. So a smaller company with high-priced shares can outweigh a much larger one whose shares trade for less. Price, not size, matters most.

The Dow has a second feature worth understanding, one that plants a seed we will return to. At first, the Dow was a true average: add up the share prices of its companies, then divide by how many companies there are in the index. But that average gets distorted over time. The Dow's membership changes as companies are swapped in and out, and some split their shares, which lowers each share's price without changing the company's value. Left alone, those changes would jolt the average for reasons that have nothing to do with the market. So the company that maintains the Dow divides not by the number of companies but by a figure of its own, the Dow Divisor — resetting it whenever a split or swap would otherwise distort the average, to keep the index comparable over time.

Here is the part I would ask you to remember. That figure — the divisor — sits in the denominator, the bottom of the fraction. Each reset is calibrated to keep the index steady through a split or a swap, and decades of those resets have carried the divisor below one, so its small size is a record of all that smoothing rather than a flaw in it. The reason I point it out is this: whatever sits in a denominator can have an outsized influence on the calculation, and as the denominator rises, the computed result falls. We met that inverse relationship back in January, when we learned that as interest rates rise, bond prices fall — the rate sits underneath, in the denominator, pushing the price the opposite way. Keep this inverse behavior in mind, because it sits at the heart of much of the financial math still ahead of us, including how we work out what a future dollar is worth today.

The S&P 500: A Measure Built on Size

If the Dow is the oldest measure and the one the public hears most, the one most professionals rely on is the S&P 500. Its roots go back to another name we met on November 1st: Henry Varnum Poor, who built a business giving investors honest financial information. That business became Standard & Poor's — the same firm behind one of the big three credit-rating agencies from our February bond episodes. In 1957, Standard & Poor's launched an index of five hundred of the largest American companies: the S&P 500.

The S&P 500 is built on a different idea than the Dow. It is weighted by size — by a company's total market value, what we call its market capitalization: the share price multiplied by the company's total number of shares. So on the S&P 500, the biggest companies carry the most weight. The Dow is built around share price; the S&P 500 is built around company size. That single difference is why the two numbers can tell you slightly different stories on the very same day.

The Nasdaq and a Bet You Did Not Choose

There is a third name you hear constantly: the Nasdaq. When people talk about investing in the Nasdaq, they usually mean the Nasdaq-100 — the hundred largest non-financial companies on the exchange. Like the S&P 500, it is weighted by size, but it leans heavily toward technology companies. And that lean matters more than it first appears.

When you put money in a fund that simply tracks an index — we will dig into those funds next week — that fund must hold whatever the index holds, and buy whatever it adds. No one is judging each company on its merits. The index decides, and the fund follows. So when you buy a Nasdaq fund, you are not just buying the market. You are buying that heavy tilt toward technology, and agreeing, in advance, to own whatever gets added next, whether you would have chosen it or not.

We are watching that play out right now. This month, the rocket-and-satellite company SpaceX went public, in the largest IPO in history. Back in May, the Nasdaq loosened a long-standing rule so a brand-new giant could join its index in weeks, rather than the usual wait of several months. The result is that anyone holding a Nasdaq-100 fund is about to own a piece of SpaceX — not because they chose it, but because the rules were changed to let it in, and their fund must follow.

It is worth pausing on that. The standards got bent to make room for the biggest player in the room. The S&P 500, by contrast, held its line — its rules require a company to show real, steady profits first, and by that test SpaceX would not yet qualify. And SpaceX is only the first. Two of the best-known artificial-intelligence companies, Anthropic and OpenAI, have both filed to go public, expected later this year. As each giant arrives, the funds tracking these indexes will buy in automatically, and the technology tilt will deepen — on behalf of millions of people who never placed that bet themselves.

What This Means for You

So the next time you hear that the market went up, pause and ask two questions: which market, and what's it measuring? On the S&P 500, a small handful of enormous companies — names like Nvidia, Apple, and Microsoft — now make up a huge share of the whole, so the market can climb on the strength of a few giants while most companies in it go nowhere.

The deeper lesson is this: an index is not a fixed, objective thing. It is built and maintained by a committee at a firm like S&P Dow Jones Indices or Nasdaq, which decides which companies go in, how heavily each one counts, and when the rules change. You, the investor, get no vote. When you buy a fund that tracks an index, you simply inherit those decisions, tilts and all. None of that makes index investing a bad idea; for most people, it remains one of the soundest ways to build wealth over time.

Next week: the vehicle most people now use to buy these indexes, the exchange-traded fund, or ETF — where that automatic, behind-the-scenes buying truly lives.

Until next week... Grace. Dignity. Compassion.