What is the ‘Standard & Poor’s 500 Index – S&P 500’

What is the ‘Standard & Poor’s 500 Index – S&P 500’

The Standard & Poor’s 500 Index (S&P 500) is an index of 500 stocks seen as a leading indicator of U.S. equities and a reflection of the performance of the large cap universe, made up of companies selected by economists. The S&P 500 is a market value weighted index and one of the common benchmarks for the U.S. stock market; other S&P indexes include small cap companies with market capitalization between $300 million and $2 billion, and an index of mid cap companies. Investment products based on the S&P 500 include index funds and exchange-traded funds are available to investors.

BREAKING DOWN ‘Standard & Poor’s 500 Index – S&P 500’

The S&P 500 is widely regarded as the most accurate gauge of the performance of large-cap American equities. While the S&P 500 focuses on the large-cap sector of the market; it is considered representative of the market because it includes a significant portion of the total value of the market. The 500 companies included in the S&P 500 are selected by the S&P Index Committee, a team of analysts and economists at Standard & Poor’s. These experts consider various factors when determining the 500 stocks that are included in the index, including market size, liquidity and industry grouping.

S&P 500 Significance

The S&P 500 has become a preferred index for U.S. stocks, unseating the Dow Jones Industrial Average (DJIA). The S&P 500 is perceived as more representative of the market because it is made of 500 companies, compared to the DJIA’s 30. There is also a major difference in how companies are represented in either index. The S&P 500 uses a market cap methodology, giving a higher weighting to larger companies, whereas the DJIA uses a price weighting methodology which gives more expensive stocks a higher weighting. The market cap ranking is also seen as more representative of real market structure.

S&P 500 Investment Options

Investors have difficulty replicating the S&P 500 because a portfolio needs stocks of 500 companies in specific quantities to replicate the index’s market cap methodology. For investors looking to replicate the S&P 500, it is easier to purchase one of the S&P 500 investment products such as the Vanguard S&P 500 ETF, the SPDR S&P 500 ETF or iShares S&P 500 Index ETF.
source: http://www.investopedia.com/terms/s/sp500.asp#ixzz4H4Y0ZtZ4

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