Sunday , 19 January 2020

What Exactly Is the S&P 500?

“…What exactly is the S&P 500?…In this article, we will take a deeper dive into the S&P 500, explain what the stock market index is, provide a background, and review how the S&P 500 determines which stocks are included in the index.”

By Lorimer Wilson, editor of munKNEE.com – Your KEY To Making Money! [Editor’s note: This article of edited excerpts* (593 words) from the original article (1009  words) by  provides you with a 41% FASTER – and EASIER – read.

“What is the S&P 500?

Let’s start with the Investopedia.com definition:

“The S&P 500 Index (formerly Standard & Poor’s 500 Index) is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value. The index is widely regarded as the best single gauge of large-cap U.S. equities.” To simplify it, the S&P 500 is a basket of 500 companies that are weighted based on the market caps of the companies included in the index. The companies included are all large-cap stocks.

The index is considered a strong gauge of the broader market/economy due to the large volume of companies included in the index and diversification of industries among the index. Below is a diagram showing the weights of the S&P 500 as of 6/30/18 and some of the previous fiscal year ends. The source of the information from the table was Siblis Research. As you can see, this is a pretty diverse index.

How was the S&P 500 Created?

The S&P 500 was introduced in its current model/format in 1957… Currently, the index is owned by the S&P Global Inc., which also owns the Dow Jones Industrial Average…

How does the S&P 500 select the companies included in the index?

The Motley Fool provided the criteria required for companies to be considered to be added to the S&P 500. This goes not guarantee a company will be added, however, each company that meets this criteria will be up for consideration. Here is the listing of the criteria that must be met to be added to the S&P 500 per The Motley Fool:

  • It must be a U.S. company.
  • The market cap must be $5.3 billion or more.
  • The public float must consist of at least 50% of outstanding shares.
  • It must have positive reported earnings in the most recent quarter, as well as over the four most recent quarters.
  • The stock must have an active market and must trade for a reasonable share price.

The S&P 500 is constantly adding or removing companies from the index so if a company suddenly meets the investment criteria or the company suddenly no longer meets the criteria, it will be evaluated and action will be taken.

How is the Index weighted?

Each company does not simply represent 1/500th of the value of the S&P 500. Instead, the S&P 500 is weighted using each companies market cap. From there, the price of the overall index is calculated using each company’s weighted percent of market cap. To calculate each company’s market cap, simply multiply the company’s share price by the current shares outstanding.

Can you invest in the S&P 500?

You can’t invest directly in the index but nearly every mutual fund or ETF family offers a low-cost fund that mirrors the S&P 500. By investing in this kind of mutual fund or ETF…you are essentially investing in the S&P 500 as the fund family will do their best to resemble the holdings and weightings of the index…

Summary

…The index:

  • provides a great benchmark for the market,
  • allows investors to achieve diversification if they choose to invest in an index fund, and
  • will reward you with a solid dividend along the way…

…Are there any additional facts about the S&P 500 that you would like to add that I did not include in the article? I know I didn’t catch them all!” [If so, please add your information in the Comment section at the bottom of the page. Thank you.]

(*The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)

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