What is the S&P 500?

N.M. Shanley

The S&P® 500 is a group of 500 large cap stocks tracked by Standard & Poor's, a financial information company. This index is commonly used as a benchmark for overall stock market performance. Investors use this index to measure the earnings results of their individual portfolios. The term S&P® 500 can also refer to the 500 companies that make up the index.

The S&P 500 is commonly used as a benchmark for overall stock market performance.
The S&P 500 is commonly used as a benchmark for overall stock market performance.

Standard & Poor's has a long history of tracking stock market and economic performance. A forerunner of the S&P® 500, the S&P® 90 index, started in 1923. The S&P® 500 originated in 1957.

The current index includes stocks from different sectors. These sectors are energy, materials, industrials, consumer discretionary, consumer staples, health care, financials, information technology, telecommunications, and utilities. Maintaining the correct mix among these sectors ensures that the index accurately represents the equities market and overall economy.

Stocks in different sectors are weighted, or given a share in the index, to match their importance in the United States economy. The S&P® 500 is a market value-weighted index. This means that each stock is weighted according to the market value of all its outstanding shares.

The stocks included in the index represent the largest and most successful companies in the United States. Only companies that meet a list of criteria are eligible for inclusion in the index. The company must be an actual operating company located in the United States. Closed-end trusts, partnerships, holding companies, and investment vehicles cannot be included in the index.

Other criteria include a market cap of over $3 billion US Dollars (USD), adequate liquidity, and competitive stock price. In addition, the company's stock must have at least 50% public float. Public float is the amount of stock traded to the public. The company must also be a proven leader in its business sector.

Members of an index committee continually review the stocks in the index. The committee's goal is to ensure that the chosen stocks accurately represent the condition of the United States equities market. Companies that experience severe and continued financial difficulties, or fail to meet eligibility requirements, may be removed from the S&P® 500. When a stock is removed from the index, it is replaced with a new one.

Investors cannot buy shares of the index. Several financial institutions have created mutual funds that include only the index stocks. Buy purchasing shares of these mutual funds, investors can match the performance of the S&P® 500.

You might also Like

Readers Also Love

Discuss this Article

Post your comments
Forgot password?