How Much Influence Can One Stock Have on the Market?
Tagged in:

"Don’t fall apart just because you get bad news about one stock or one sector."

Tap to Read Full Story

The stock market's had a rough start this week. The Standard & Poor’s 500-stock index dropped 1.4 percent on Monday, while the tech-heavy Nasdaq index fell 1.8 percent.

What happened?

A few things. Some investors may be getting jittery about a likely interest rate hike to be announced this week, as it would make debt more expensive. And the ongoing political drama probably isn’t helping, either. But the top story is that Facebook and its CEO Mark Zuckerberg have more explaining to do: While the social network continues to struggle with news about its role in Russia’s alleged meddling in the 2016 U.S. presidential election, another data company has been found to have improperly kept data on millions of Facebook users.

Investors reacted with an angry face. Facebook’s stock fell by nearly 7 percent—it’s worst one-day drop in four years—and dragged down the indexes, too.

One stock can make that big of a difference?

Probably not. But Facebook’s recent struggles do highlight bigger problems for the entire tech industry, namely concerns over regulation and privacy issues. So other tech companies followed the social media giant down today, with Apple shedding 1.5 percent and Google-parent Alphabet dropping 3 percent. And as the tech industry has grown, its influence on the overall market has, too—as those companies now carry more weight in major indexes like the Nasdaq and S&P 500.

Why is that?

Because of how we measure market performance. We tend to pick a basket of companies to track in order to represent the entire U.S. market, just like we did above. In Standard & Poor’s 500-stock index, companies with the biggest market capitalizations have the greatest pull on overall performance. Apple, Microsoft, Amazon and Facebook have the heaviest weightings in that index, meaning it clearly had a bad day today.

So what can I do about all of this?

Maintain a well-diversified portfolio that doesn’t rely too heavily on one stock or one industry. And don’t fall apart just because you get bad news about that one stock or one sector. Ignore the noise and stick with your long-term plan—so your status can keep you feeling #blessed.

Get the Grow Newsletter
The best money advice you never got, delivered to your inbox biweekly.
The best money advice you never got, delivered to your inbox biweekly.