The S&P 500 is an index of 500 stocks chosen by Standard & Poor's company. It represents approximately two-thirds of the value of all publicly traded companies in the United States.
It was created on March 4, 1957, and has been updated many times since then. The S&P 500 includes companies from various industries, including technology, healthcare, energy, and financial services. It is one of the most important indexes globally and is often used as a benchmark for investment performance.
The S&P 500 is a key indicator of the health of the U.S. economy, and analysts often use it to predict economic trends.
In this blog post, we will take a detailed look at the S&P 500, including its history, the companies it includes, and why it matters.
S&P 500 History
- The S&P 500 was created in March 1957 by "Standard & Poor's." This is an American credit rating agency that provides financial information, analytics, and investment management services;
- Initially, the number of companies united under this name was less. But by 1971, the number 500 had formed;
- In August 1976, The Vanguard Group offered the first mutual fund to retail investors that tracked the index;
- On April 21, 1982, the Chicago Mercantile Exchange began trading futures based on the index;
- During the 2008 financial crisis and the Great Recession (from October 2007 to March 2009), the S&P 500 fell 46.13%. It took four years to cover all the losses;
- The consequences of the coronavirus pandemic have led the world into recession. Stock markets were unstable as the S&P 500 fell nearly 20%. However, by the second half of 2020, the S&P 500 began to recover and reached several historical highs by 2021.
How many and which companies are included in it?
The S&P 500 includes the 500 largest publicly-traded companies in the U.S. The S&P Index Committee selects them.
To be included in the S&P 500, a company have to meet specific criteria, including being headquartered in the United States, being listed on a major US stock exchange, and has a market capitalization equal to or greater than US$14.6 billion.
Since 2017, companies with dual share classes are not added to the index.
The S&P 500 is a market-weighted index, meaning that the larger a company's market capitalization, the greater its impact on the index.
It includes companies from a variety of industries, including technology, healthcare, energy, and financial services.
Here is a breakdown of the S&P 500 by sector (March 2022):
- Information technology: 28.1%
- Health care: 13.3%
- Consumer discretionary: 11.8%
- Financials: 11.5%
- Communication services: 9.6%
- Industrials: 8%
- Consumer staples: 6.2%
- Energy: 3.7%
- Real estate: 2.6%
- Materials: 2.6%
- Utilities: 2.6%
This weighting has significantly changed over the years. As we can see, now it is going toward information technology, healthcare, and consumer discretionary.
As the S&P 500 is a stock market index, it constantly changes as companies are added or removed.
As of April 2022, here are the top five companies by market capitalization in the S&P 500:
- Apple Inc. (AAPL)
- Microsoft Corporation (MSFT)
- Amazon.com, Inc. (AMZN)
- Tesla Inc. (TSLA)
- Alphabet Inc. Class A (GOOGL)
The S&P 500 is a key indicator of the health of the U.S. economy, and analysts often use it to predict economic trends.
Why does it matter to investors?
The S&P 500 is often used as a benchmark for investment performance. Many investors compare the returns of their portfolios to the S&P 500 to see how they are performing.
Stock market players can also invest directly in the S&P 500 through index funds and exchange-traded funds (ETFs). These products track the performance of the S&P 500 and can be bought and sold like any other stock.
Investing in the S&P 500 is a way to get exposure to many companies at once. This can be beneficial for investors who want diversification in their portfolios. Many advisors and experts consider S&P 500 as a good starting point for beginners.
However, S&P 500 has some disadvantages too. One of them is that it only contains large-cap stocks. This might be risky for investors who want to diversify their portfolios with small- and mid-cap stocks.
S&P 500 is also a US-centric index, so it does not provide exposure to international markets. For this reason, some investors choose to invest in other global stock market indexes, such as the MSCI World Index.
Some experts suggest putting a part of your stock portfolio to equities based in Asia, South America, and Europe markets. Many mutual funds and ETFs are designed to take advantage of these non-U.S. possibilities.
How the S&P 500 is calculated?
The S&P 500 Index's value is computed by a free-float market capitalization-weighted methodology. This means that the S&P 500 companies' stocks are weighted according to how much they would be worth if all their shares were available to trade on the stock market.
For example, if Company A has a share price of $100 and 100 million shares outstanding, its market capitalization would be $100 million.
If Company B has a share price of $200 and there are 50 million shares outstanding, its market capitalization would be $100 million.
In this example, even though both companies have the same market capitalization, Company A would have a higher weighting in the S&P 500 because it has a lower share price.
The S&P 500 is rebalanced every quarter. And do not forget that the weightings of each company in the index can change over time.
This is different from other indexes, such as the Dow Jones Industrial Average (DJIA), which uses a price-weighted methodology. The DJIA is calculated using the companies' stock prices in the index, regardless of their market capitalization.
If you're interested in investing, or just want to stay up-to-date on what's happening in the stock market, it's important to know what the S&P 500 is and how it works.
We hope this blog post has helped you gain a better understanding of this important economic indicator. Thank you for reading!
