What is the S&P 500 Index?
The S&P 500 or S&P 500 is a market capitalization-weighted index of the 500 leading public companies in the United States. It is not an exact list of the 500 largest U.S. companies by market capitalization, as the index includes other criteria. Nonetheless, the S&P 500 is considered one of the best indicators of the performance of well-known stocks in the U.S., and therefore the stock market as a whole.
- The S&P 500 includes 500 leading U.S. public companies, with a focus on market capitalization.
- The S&P is a float-weighted index, which means the market capitalization of companies in the index is adjusted for the number of shares available for public trading.
- Because of its depth and diversity, the S&P 500 is widely regarded as one of the best measures of major U.S. stocks and the stock market as a whole.
- You can’t invest directly in the S&P 500 because it’s an index, but you can invest in one of the many funds that use it as a benchmark and track its composition and performance.
S&P 500 Weighting Formulas and Calculations
The S&P 500 uses a market capitalization-weighted index that assigns a higher percentage to the largest companies by market capitalization.
Company Weighting in S & P=Total of all market caps/Company market cap
Determining the weights for each component of the S&P 500 starts by adding up the total market capitalization of the index by adding up the market capitalizations of all companies in the index.
For verification, a company’s market capitalization is calculated by multiplying the current share price by the company’s outstanding shares. Fortunately, the total market capitalization of the S&P 500, as well as the market capitalization of individual companies, is usually published on financial websites, so investors don’t have to calculate them.
The weight of each company in the index is calculated by dividing the company’s market capitalization by the index’s total market capitalization.
Other S&P Indices
The S&P 500 is a member of the S&P Global 1200 Index family. 3 Other popular indexes include the S&P MidCap 400, which represents mid-cap companies, and the S&P Small Cap 600, which represents small-cap companies. The S&P 500, S&P MidCap 400, and S&P SmallCap 600 collectively cover 90% of all U.S. market capitalization in an index called the S&P Composite 1500.4
Structure of the S&P 500
S&P uses only free float in calculating market capitalization; H. Stocks that can be traded by the public. Standard & Poor’s adjusts each company’s market value to compensate for new share issues or company mergers. The value of the index is calculated by adding the adjusted market capitalization of each company and dividing the result by the divisor. Divisors are S&P proprietary information and unpublished.
However, we can calculate a company’s weight in the index, which can provide investors with valuable information. If a stock goes up or down, we can see if this affects the overall index. For example, a company with a weight of 10% has a greater impact on the index value than a company with a weight of 2%.
The S&P 500 is one of the most widely traded indexes in the United States because it represents the largest publicly traded companies in the country. The S&P 500 focuses on large-cap stocks in the U.S. market and is also a float-weighted index (a capitalization weight). , which means a company’s market capitalization is adjusted based on the number of shares available for public trading.
IMPORTANT: The latest adjustment to the S&P 500 was announced on December 3, 2021, and is effective before the market opens on December 20, 2021. S&P MidCap 400 constituents Signature Bank (SBNY), SolarEdge Technologies Inc. (SEDG) and FactSet Research Systems Inc. (FDS) were all upgraded to the S&P 500, replacing Leggett & Platt Inc. (LEG), Hanesbrands Constituent Companies (HBI) and Western Union (WU) — all of which make it into the S&P MidCap 400.
S&P 500 Competitors
S&P 500 vs. Dow Jones
Another common U.S. stock market benchmark is the Dow Jones Industrial Average (DJIA). While the S&P 500 is often the index of choice for institutional investors due to its depth and breadth, the Dow has historically been associated with significant stocks from a retail investor perspective. Institutional investors view the S&P 500 as a better representation of the U.S. stock market because it covers more stocks across all sectors (500 vs. Dow 30).
Additionally, the S&P 500 uses a market capitalization approach, giving higher percentage allocations to companies with the largest market capitalization, while the DJIA is a price-weighted index that gives higher index weights to companies with higher stock prices. In U.S. indices, market capitalization-weighted structures tend to be more common than price-weighted structures.
S&P 500 and Nasdaq
Nasdaq is the global electronic marketplace for securities trading. There are several stock market indexes that include stocks traded on the Nasdaq. Note that stocks included in the S&P 500 may also be included in one or more of the various Nasdaq indices.
The most followed Nasdaq stock indices include: The Nasdaq 100, which contains the 100 largest and most actively traded common stocks listed on Nasdaq; the Nasdaq Composite, commonly referred to by the media as ” Nasdaq, which includes more than 2,500 common stocks traded on Nasdaq; the Nasdaq Global Equity Index (NQGI), which includes international stocks; and the PHLX Semiconductor Industry Index (SOX), which The main barometer of industry-related stocks; the OMX Stockholm 30 Index (OMXS30), consisting of 30 stocks actively traded on the Stockholm Stock Exchange.
S&P 500 vs Russell
The S&P 500 is a member of a family of indices created by Standard & Poor’s. The S&P index is similar to the Russell index, both are market capitalization-weighted indices unless otherwise stated (such as an index with equal weight).
However, there are two key differences in the construction of the S&P and Russell index series. First, S&P selects companies through a committee, while Russell uses a formula to select stocks to include. Second, there is no naming overlap between the S&P Style Indices (Growth and Value), while the Russell Indices use the same company to include both Value and Growth Style Indices.
S&P 500 and Vanguard 500 Funds
The Vanguard 500 Index Fund attempts to replicate the price and return performance of the S&P 500 by investing all of its net worth in the stocks that make up the index and weighting each component roughly the same as the S&P. In this way, the fund hardly strays from the S&P index it aims to emulate.
TIP: The S&P 500 is an index and therefore cannot be traded directly. Those wishing to invest in the companies that make up the S&P index must invest in a mutual fund or exchange-traded fund (ETF) that tracks the index, such as the B. Vanguard 500 ETF (VOO).
S&P 500 Index Limits
One of the limitations of the S&P and other market-cap-weighted indices comes when stocks in the index are overvalued, meaning they rise more than their fundamentals warrant. Typically, when a stock is heavily weighted in an index and is simultaneously overvalued, that stock increases the overall value or price of the index.
An increase in a company’s market capitalization does not necessarily reflect the fundamentals of the company, but rather the appreciation of the stock relative to its outstanding shares. As a result, equal-weighted indices in which each company’s share price movements have an equal impact on the index are becoming more popular.
Standard & Poor’s 500 Market Cap Example
To understand how the underlying stock affects the S&P, individual market weights must be calculated by dividing each company’s market capitalization by the index’s total market capitalization. Here is an example of Apple’s weight in the index:
Apple Inc. (AAPL) reported 16.71 billion shares of common stock outstanding and outstanding in its October 2021 annual filing, with a share price of $173 on February 15, 2022.
As of February 15, 2022, Apple has a market cap of $2.82 trillion (or $16.32 billion x $173). $2.82 trillion is used as the numerator of the index calculation.
As of January 31, 2022, the total market capitalization of the S&P 500 was approximately $40.15 trillion, which is the combined market capitalization of all stocks in the index.
Apple’s weight in the index is about 7%, or $2.82 trillion divided by $40.15 trillion.
In general, the greater the market weight of a company, the greater the impact on the index for every 1% change in its share price. Note that S&P does not currently provide a complete list of all 500 companies on its website, with the exception of the top 10.
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