For Teachers: Lessons on the Dow and the S&P 500

For those new to The Stock Market Game program, the Dow and the S&P 500 may be new concepts. So what do they really represent?
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The Stock Market Game Week in Review: Jan. 28 - Feb. 1

Faced with growing risks of a recession, the

Federal Reserve

(a.k.a., The Fed) made its second significant interest rate cut in a week and slashed the

discount rate. The federal funds rate -- the lending rate that affects how much interest consumers pay on credit cards,

home equity lines of credit and auto loans - was cut 3.0% from 3.5%. The rate was 5.25% only four short months ago! The discount rate, which is what banks pay to borrow directly from the Fed, was also cut by half a point to 3.5% on Wednesday

Jan. 30.

According to the Fed, it sees growing weaknesses in both the job market and the battered housing market and hinted it will continue to cut rates if the economy shows more signs of decline.

Despite a rally that put the

Dow

(DJI)

more than 400 points to the upside last week as of Thursday's

Jan. 31 close, the Dow and the

S&P 500

(SPX)

suffered significant losses during the month of January. The Dow lost 4.6% since the beginning of the month - its worst since January 2000, while the S&P 500 lost 6.1% -- its worst since 1990. Many on Wall Street are touting "

as January goes, so goes the year." But what does this all mean?

According to the Stock Traders Almanac, the performance of the S&P 500 in January is often an accurate predictor of how the overall market performs during the entire year. The Almanac states this theory has proven true 75% of the time since 1950. The stat works partly because January is such a pivotal month. It is the month new Congresses meet, a new president is inaugurated and it is the month when the year's budget is set. What will be interesting this year is the impact of the presidential election. According to market historians, 17 of the last 25 election years have seen the Dow and S&P 500 finish in the black.

For those new to The Stock Market Game program, the Dow and the S&P 500 may be new concepts. What do these

indexes really represent? Both are used as a gauge for the overall health of the market. Unlike some other indexes that are weighted according to companies'

market values, the Dow is price-weighted,

meaning all companies included in the index are not represented equally

. It uses a divisor that determines the percentage of the Dow the stock represents according to its price. The divisor is also adjusted to reflect the effects of

stock splits and

dividends. Many

analysts are critical of the Dow since it contains just 30 companies. Many feel the Standard & Poor's 500 (S&P 500) index, which tracks 500 major American companies, offers a more accurate reflection of the overall market.

For more information on the Dow, be sure to check out

The Dow Takes a Bow - Then a Blow!

edition of "In the News." This issue briefly explains the Dow and examines its long-term ascent from under 1,000 in 1970. Elementary and middle school students can learn more about the Fed in the

Ashley and the Fed

edition of "Stock Talk." In this issue, readers learn what interest rates are and how the Federal Reserve often adjusts them to influence the economy. Both newsletters are accessible in the

Publications

section of the

Teacher Support Center .

And last but not least, how could we forget the Super Bowl? Thanks to Dr. Allen Cox in Maryland, The Stock Market Game has developed a high school project around one of the most watched television events of the year. While many will tune in to see the action on the field, millions tune in just to see the commercials. This project has students interpret stock data and make informed decisions about the impact of Super Bowl advertising on a company's stock price. The project includes activities for both before and after the contest, so check it out. To access the project, go to the

Teacher Support Center. Then follow these steps:

1. Click the Projects" link in the In the Classroom section.

2. Select Overarching Projects as your unit.

3. Select High School as your grade.

4. Select either Business, Economics, Social Studies or Language Arts as your subject.

This article was written by a staff member of The Stock Market Game.