Wednesday , 11 December 2019

What Is the S&P 500 Index & How Exactly Does It Work?

The S&P 500 index is an American stock market index based on the capitalization of 500 large companies that have common stock listed on the NASDAQ and NYSE (New York Stock Exchange). The index is one of the most frequently followed equity indicators as many traders consider it the best depiction of the U.S. stock market. 

…As the name suggests, the S&P 500 is made up of the 500 largest-cap U.S. stocks. Combined, these stocks account for 80% of all U.S. market capitalization. This is the primary reason why, as we stated earlier, the index is considered such a good barometer of how U.S. markets are performing.

Currently, the 10 largest companies listed in the index are Apple, Microsoft, ExxonMobil, Johnson & Johnson, General Electric, Amazon.com, Facebook, Berkshire Hathaway, AT&T, and JPMorgan Chase.  #munKNEE/Money!

S&P 500 Companies By Weight

…The index is weighted according to market capitalization. This means that the part of the index represented by each company is relative to its market capitalization. Apple, for example, is the largest part of the index. Its market cap is approximately 2.9% of the index total. Therefore 2.9% of the index is based upon Apple’s performance alone. In contrast to this model, an index like the Dow Jones Industrial Average is based on price.

Unlike the Dow which only indexes 30 companies and is based on a price-weighted system,

  • the market-cap-weighted S&P system is a much better tool for judging the health of an economy because the larger companies have a larger influence and sway on the index.
  • Another reason to look at the S&P as a benchmark is because the parts of the index are updated every 3 months. This quarterly update guarantees that the index is an accurate representation and reflection of the state and health of the large-cap market.
  • The drawbacks, however, are that:
    • the S&P 500 sectors do not reflect the values of bonds, precious metals, or cash so if you’re an investor with a wide variety of assets, this index will not give you an accurate view of your entire portfolio’s health and
    • the index also does not include companies outside of the United States.
Editor’s Note: The above excerpts are from the original article by Gil Ben Hur, and have been re-formatted, color highlighted, edited ([ ])* and abridged (…) by Lorimer Wilson, editor of munKNEE.com – Your KEY To Making Money! – for the sake of clarity, and brevity to provide a fast and easy read.

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*(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.)