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The S&P 500 and How It Works

Sebencapital

Published
27/12/23
The S&P 500 and How It Works

S&P stands for Standard and Poor, the names of the two companies that started it. It was officially started on March 4, 1957, by Standard & Poor. Later, McGraw-Hill took it over in 1966. As of 2022, it's owned by S&P Dow Jones Indices, a partnership between S&P Global (formerly McGraw Hill Financial), CME Group, and News Corp, the owner of Dow Jones.

As of January 7, 2022, the S&P 500 had an average yearly return of 13.9% over the past 10 years.

Key Takeaways

  • Investors often check the S&P 500 to see how the whole stock market is performing. It's seen as an important indicator of the U.S. economy.
  • It follows 500 big U.S. companies that are traded publicly. To be in the S&P 500, companies must meet certain requirements. The types of businesses in the S&P 500 usually show how the U.S. economy is made up.
  • People can buy stocks from companies in the S&P 500 or invest in funds that follow the S&P 500.

How the S&P 500 Works

The S&P 500 keeps an eye on how much all the companies in its list are worth. Market cap shows the total value of all the shares a company has. To find it, you multiply the number of shares by the stock price. For example, a company with a market cap of ₹100 billion is represented ten times more than a company with a market cap of ₹10 billion. As of January 2022, the S&P 500's total market cap was ₹34 trillion.

Note

The index uses a float-adjusted market cap for its weighting. This means it focuses only on the shares available for the public to buy. It doesn't include shares held by controlling groups, other companies, or government agencies.

A team picks the 500 companies for the index based on how easily their stocks can be bought or sold, their size, and what industry they're in. They adjust the index every three months: in March, June, September, and December.

For a company to get into the index, it needs to be in the United States and have a market value of at least ₹13.1 billion. More than half of its stocks must be available for the public to buy. Its stock price must be at least ₹1 per share. It also needs to file a specific type of annual report called a 10-K. Over half of its assets and money earned must come from the United States. Lastly, it should have made a profit for four quarters in a row.

The company's stock can't be traded on pink sheets or over-the-counter. It needs to be listed on well-known stock exchanges like the New York Stock Exchange, Investors Exchange, Nasdaq, or BATS Global Markets.

By January 7, 2022, the S&P 500's top ten biggest companies, based on their market value, were:

  1. Apple Inc. (AAPL)
  2. Microsoft Corp. (MSFT)
  3. Amazon.com Inc. (AMZN)
  4. Alphabet Inc. A (GOOGL)
  5. Tesla, Inc (TSLA)
  6. Alphabet Inc. C (GOOG)
  7. Meta Platforms, Inc. Class A (FB)
  8. Nvidia Corp. (NVDA)
  9. Berkshire Hathaway B (BRK.B)
  10. Unitedhealth Group Inc. (UNH)

Note

The industries in the S&P 500 show how the economy is structured.

As of January 7, 2022, the S&P 500 was divided into different sectors, which were:

  • Information Technology: 29.2%
  • Health Care: 13.3%
  • Consumer Discretionary: 12.5%
  • Financials: 10.7%
  • Communication Services: 10.2%
  • Industrials: 7.8%
  • Consumer Staples: 5.9%
  • Real Estate: 2.8%
  • Energy: 2.7%
  • Materials: 2.6%
  • Utilities: 2.5%

S&P 500 vs. Other Stock Market Indexes

The S&P 500 has more big companies compared to the Dow Jones Industrial Average. The Dow follows 30 companies that show different industries. It represents almost 25% of the U.S. stock market and is widely used as a key market indicator globally.

The S&P 500 has less technology-focused companies than the Nasdaq. Around June 2021, about 55% of Nasdaq companies were related to information technology, while the S&P 500 had 28%.

Despite their variations, these stock indexes often move in a similar way. You can gauge how the overall stock market is performing by paying attention to just one of them. Following all three is not necessary.

Milestones of the S&P 500

The table below displays important moments in the history of the S&P 500, such as its highs, lows, and other notable events.

JUNE 4, 1968100.38First time above 100
OCT. 19, 1987224.84Black Monday
MARCH 24, 1995500.97First close above 500
FEB. 2, 19981,001.27First close above 1,000
OCT. 9, 20071,565.15Highest close before financial crisis
OCT. 13, 20081,003.35Largest % gain of 11.6%
AUG. 26, 20142,000.02First close above 2,000
SEPT. 21, 20182,929.67New record high
JULY 12, 20193,013.77First close above 3,000
MARCH 12, 20202,480.64Largest % decline since Black Monday, entered bear market
MARCH 23, 20202,237.40Stock crash low
AUGUST 18, 20203,389.78New record high end of bear market
AUGUST 28, 20203,508.01Closes above 3,500
APRIL 1, 20214,019.87Closes above 4,000
OCT. 13, 20214,519.63Closes above 4,500

How to Use the S&P 500 to Make Money

You can't directly invest in the S&P 500, but you can copy its performance by using an index fund. Another option is to buy stocks from companies listed in the S&P 500.

Note

You can adjust the importance of stocks in your investment portfolio based on their market value, similar to how the S&P does it.

You can look at the S&P 500 to see how the U.S. economy is doing. When people feel good about the economy, they usually buy more stocks.

As the S&P 500 focuses on U.S. stocks, keeping an eye on international markets, like China and India, can give you a broader perspective. You might also think about investing a small part of your money in commodities like gold. These can keep their worth even if stock prices drop.

In addition to watching the S&P 500, keeping an eye on the bond market can assist your investment plans. Standard & Poor's rates bonds. While bond prices often move differently than stocks, this isn't always true. Both bond and stock prices can sometimes change a lot.

There are various bond types like Treasury, corporate, and municipal bonds. Bonds help to keep the U.S. economy running smoothly by providing liquidity. They can also affect mortgage interest rates.

Frequently Asked Questions (FAQs)

How do you invest in the S&P 500?

You can't invest directly in the S&P 500 itself, but you can invest in individual companies listed within its index. Another way is to invest in S&P 500 index funds, which aim to mirror the performance of the S&P 500 closely.

What companies are in the S&P 500?

To be part of the S&P 500, companies need a market value of at least ₹13.1 billion without adjustments. They also must meet requirements related to how easy it is to buy and sell their stock, as well as show they are profitable.

What does the S&P 500 measure?

The S&P 500 keeps an eye on the value of 500 stocks it includes. These stocks come from the biggest companies in the U.S., chosen based on their total worth in the stock market.

Written by Sauravsingh

Techpreneur and adept trader, Sauravsingh Tomar seamlessly blends the worlds of technology and finance. With rich experience in Forex and Stock markets, he's not only a trading maven but also a pioneer in innovative digital solutions. Beyond charts and code, Sauravsingh is a passionate mentor, guiding many towards financial and technological success. In his downtime, he's often found exploring new places or immersed in a compelling read.

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