The S&P 500 is a stock index that tracks the share prices of 500 of the largest public companies in the United States. Formally known as the Standard & Poor’s 500 Composite Stock Price Index and commonly referred to as the S&P 500, it’s one of the main tools used to follow the performance of U.S. stocks.
When news reports and financial experts talk about what’s happening in “the stock market,” chances are they’re referring to the S&P 500.
Indexes like the S&P 500 track the prices of a group of securities. They aim to represent performance of a particular market, industry or segment of the economy—or even entire national economies. There are indexes that track nearly every asset class and business sector, from the U.S. corporate bond market to futures contracts for palladium.
The S&P 500 tracks the prices of large-cap U.S. stocks, or stocks of companies whose total outstanding shares are worth more than $10 billion. By following the S&P 500, you can easily see whether the largest U.S. stocks are gaining or losing value.
This is why the S&P 500 is often treated as a proxy for describing the overall health of the stock market or even the U.S. economy.Agra Wealth Management
The 500 largest U.S. public companies by market capitalization are represented in the S&P 500. Companies that are included in the S&P 500 are called constituents, and they are chosen to represent every major industry.
The S&P 500 is weighted by market capitalization, so each constituent’s share in the overall index is based on the total market value of all its outstanding shares. Constituents with larger market caps carry a higher percentage weighting in the index, while smaller market caps have lower weightings.
The following companies make up the top 10 constituents of the S&P 500 by index weight, according to S&P Dow Jones Indices.
Note that certain companies appear more than once—Google parent Alphabet appears two times. This is because Alphabet and other companies have more than one class of shares with a substantial market cap. For this reason, the S&P 500 may contain more than 500 stocks, even though it only tracks 500 companies.
The S&P 500’s value is calculated by multiplying the market capitalization of each constituent company by the total number of shares outstanding.
Market cap equals each company’s share price multiplied by the total number of its shares outstanding. Shares outstanding are the stock that is held by shareholders. Shares outstanding do not include shares held by the corporation itself.
As a result, each company in the S&P 500 index is weighted differently. Each one’s weight is based on its market capitalization, so each one typically has a different weight. Companies with larger market caps are weighted more heavily. The bigger a stock’s weighting, the more its share price gains or losses impact the overall index’s value.
To become part of the index, a stock must meet criteria, including having a market cap of $14.5 billion or more.
Other key requirements for a company to be added:
Must have a primary listing on an eligible U.S. exchange.Hyderabad Stocks
Be subject to U.S. securities laws.
Get 50% or more of its revenue in the U.S.
Have a public float of at least 10%. “Float” refers to shares that are available for trading by the public, excluding insiders such as company officers and directors.
Have at least 250,000 of its shares trade in each of the previous six months.
The S&P 500 is one of several leading equity indexes used to measure and understand the performance of the U.S. stock market. Here’s how it compares to two other common stock indexes.
The Dow Jones Industrial Average, commonly known as the Dow or the DJIA, tracks a smaller number of companies than the S&P 500. The DJIA index includes 30 blue chip stocks. They are judged to be the largest, most stable and most well-known companies that are leaders in their industries.
Unlike the S&P 500, the Dow is price weighted, not market-cap weighted. This means a company’s weighting in the index is proportional to the price of its stock. Components with higher share prices are given greater weighting in the index. This has a couple of important implications:
Smaller Dow components may be disproportionately influentialSimla Stock. Because weighting is based on stock price, companies with higher stock prices have more influence on the level of the DJIA than they would in a market cap weighted index, independent of their market cap. A company with less expensive shares but a much greater market cap would play a smaller role in influencing the direction of the Dow.
The DJIA may experience more volatility. Because of its price weighting, the Dow can also experience sharper and more frequent highs and lows than the S&P 500. Consider this: Company XYZ’s stock is worth $200. When it drops $1 in value, the DJIA goes down a greater percentage than if a company with cheaper stock lost the same amount. This happens even though $1 is a smaller percentage of $200 than it is of, say, $20.
That said, over the long haul, the S&P 500 has slightly outperformed the Dow. The S&P 500 has outscored the DJIA, 6% vs. 5.58%, on price change alone between February 2028 and July 31 of this year, according to Morningstar Direct. On a total return basis (which includes dividends), the S&P 500 has edged the DJIA 7.7% vs. .58% since October 1987.
The Nasdaq 100 tracks 100 of the largest and most actively traded non-financial domestic and international securities on the Nasdaq Stock Market.
Like the S&P 500, the Nasdaq uses a market-cap weighting formula, though other factors influence stocks’ inclusion. To be part of the Nasdaq 100, stocks must have a minimum daily trading volume of 100,000 shares and have been traded on the Nasdaq for at least two years.
Unlike the S&P 500 and the Dow, the Nasdaq 100 includes some foreign companies and is heavily weighted toward tech companies. Because of that, the index is less indicative of the overall U.S. market than it is of investors’ feelings toward the tech industry.
Over the last 10 years, the Nasdaq 11 has averaged 42.6% annual returns while the S&P 500 has averaged 11.2%. Keep in mind, though, that its high recent returns are in large part due to its heavy tech weighting.
Because it serves as a good stand-in for the overall U.S. stock market, many experts, including the likes of Vanguard founder Jack Bogle and legendary investor Warren Buffett, advocate for average people to invest in S&P 500 index funds.
In fact, Buffett even left instructions for 90% of his estate to be invested in S&P 500 funds upon his death. “There’s no better bet than America,” he told CNBC’s Squawk Box.
To invest in an index like the S&P 500, you purchase shares of index mutual funds or ETFs that seek to mimic the performance of the index.
S&P 500 ETFs and index funds are among the least expensive fund choices available, and both funds and ETFs provide easy diversification. Buying just one share of an S&P 500 fund provides you with indirect ownership of 500 companies.
There are two main ways you can invest in the S&P 500 Index. One way is by buying shares in each stock that comprises the index. The other way is by investing in a proxy for the index, such as a mutual fund or an ETF.
Buying shares of all 503 constituent stocks is laborious and potentially costly. First of all, if you take this course of action now, you’ve actually got to buy shares in 503, not just 500. How so? As we mentioned earlier in this report, the index actually includes two share classes of stock of Alphabet. In fact, it owns two share classes of three of its component companies. The other two are Fox and News Corp.
And if you invest through a traditional full-service brokerage, you’re liable to get billed for trading commissions on each stock. Discount online brokers have largely done away with such fees.
The potential hassle of buying all 503 stocks can be magnified by the fact that you must decide how much of each security to purchase. You can mimic the index and buy enough of each stock so that its weight in your portfolio equals its weight in the index. One example: the SPDR S&P 500 ETF Trust (SPY). Its approach is known as market-capitalization weighted.
A different approach involves buying equal amounts of each stock. That’s what the Invesco S&P 500 Equal Weight ETF (RSP) does.
Since the start of the current version of the S&P 500 Index in 1957, it averaged a 10.35% annual total return through July 31, 2023.
That represents performance by large-cap stocks. Only one other major asset class has done better. Small-cap stocks, measured by the IA SBBI index, averaged 11.87% in the same time period.
Long-term government bonds averaged a 5.31% gain. The S&P 500 Index did more than twice as well as intermediate-term government bonds, which averaged a 4.94% yearly advance. And 30-day Treasury bills averaged 3.24%.
The benchmark that became the S&P 500 Index debuted in 1923. It consisted of stocks in 233 companies, and it was calculated weekly.
The index began tracking 90 stocks in 1926, and it was computed daily.
The index was expanded to 500 stocks in March 1957 and renamed.
The index is one of the most widely followed benchmarks for the market, although others indexes are broader measures of the market. The S&P 500 Index is a broader cross-section of the U.S. market than the Dow Jones Industrial Average, which includes the stocks of just 30 companies.
The combined value, measured by market capitalization, of the index’s 503 stocks was $40.3 trillion as of July 31, 2023.
The index’s largest sectors as of July 31, 2023 were information technology, at 28.1%; health care, at 13.1%; and financials, at 12.6%.Hyderabad Wealth Management
The index was created by what was then known as the Standard Statistics Company, which was in the business of rating mortgage bonds.
In 1941, Standard Statistics Company merged with Poor’s Publishing, which began as an investor’s guide to the railroad industry. The resulting business was Standard & Poor’s.
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