The S&P 500 (S&P) is a list of 500 large publicly traded American companies that are listed on the NYSE or NASDAQ. It provides a snapshot of the stock market and how the economy is doing at any given time.
S&P is an abbreviation for Standard and Poor’s, the independent credit rating agency that publishes the index. It includes companies across different sectors and industries.
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The S&P is one of the most important resources used to judge the performance of the stock market.
Because the companies in it are meant to represent the overall market, the S&P 500 index is used as a benchmark for investors around the world. The percentage of change in the value of the index in a given year, which is called its “return,” is often used as a standard to meet or beat by investors.
Many passive investments, such as mutual funds and ETFs, try to match the holdings and returns of the S&P. These investments “track” the index, meaning that the managers of these funds invest in the same companies and attempt to match the same weights as the actual S&P 500.
The holdings of these funds only change when a company in the S&P is added or removed. The goal is to generate returns without actively buying and selling stocks, assuming that the market is generally “bullish” and will produce positive returns over time.
How Companies Are Chosen
Requirements to be part of the S&P 500 include:
- A market cap of at least $5.3 billion
- Adequate liquidity
- Trading activity of at least 250,000 shares every six months
- A U.S. company with at least 50% of its assets and revenues being of American origin
- Positive earnings for the past four quarters
- At least 50% of shares owned by public investors
The companies on the index may change from year to year. In 2016, the index included Apple, Netflix, and Coca-Cola, among others.
The companies on the index are typically referred to as “constituents.”
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How It Works
The value of the S&P 500 is calculated by determining the value or “market cap” of all the companies.
The market capitalization or “market cap” of a company is calculated by simply multiplying the number of shares of stock outstanding by the price per share. A company with one million shares priced at $50 per share would have a market cap of $50 million. The sum of all the market caps of all the constituent companies is the value of the S&P 500.
Apple and Alphabet (Google’s parent company) are two of the biggest constituents in the S&P:
Apple and Alphabet in the S&P
|Apple, Inc. (AAPL)||5.332 billion||$115.86||$617.80 billion|
|Alphabet Inc. (GOOG)||689.24 million||$792.71||$546.37 billion|
The relative importance of a given stock to the overall value of the S&P is reflected by its “weight.” The weight of a given constituent is determined by dividing its market cap by the total value of the index, and the total of all weights always equal 100%.
Weights are used to indicate how important price fluctuations in a single stock are to the value of the whole index. The higher a constituent’s weight, the more a change in its stock price will affect the value of the S&P as a whole.
The S&P 500, the Dow, and the Nasdaq
The primary difference between the S&P and the Dow Jones Industrial Average, or Dow, is that the Dow only includes 30 industry leaders.
On the other end of the spectrum, the Nasdaq Composite is an index that tracks all 4,000+ stocks being traded on the Nasdaq exchange.
- The S&P 500 was originally published in 1957.
- Despite its name, the S&P 500 currently includes 505 actual stocks because it includes two different share classes from five of its constituent companies.