The S&P 500 is considered to be a good benchmark for the general health of the U.S. stock market. The index measures the stocks of 500 of the largest publicly traded, or large-cap, U.S. companies ranging from Microsoft to Facebook. If you want to school yourself on the stock market, it makes sense to pay attention to the S&P 500.
In 2019, the S&P 500 has closed at an all-time high 11 times so far. It even traded above 3,000 for the first time on July 12 and is up nearly 20% since the start of the year. In the past 10 years, it’s grown 330%.
Here’s a crash course on the S&P 500 index so that you can educate yourself as an investor.
When was the S&P 500 founded?
Officially created in 1957 by financial companies Standard and Poor’s, the index is now owned by the S&P Dow Jones Indices, a joint venture between S&P Financial (formerly known as McGraw Hill Financial), global markets company CME Group and media company News Corp., which owns Dow Jones.
Despite being referred to as “500,” there are actually 505 listed stocks because a methodology change led to more companies having multiple listings in the index due to multiple share classes. For instance, Google’s parent company Alphabet has Class A and Class C shares.
Today, the S&P 500 index covers approximately 80 percent of available market capitalization (or the total dollar market value of all listed companies’ outstanding shares).
How is the S&P 500’s market cap calculated?
The S&P 500 is the first U.S. market-cap-weighted stock market index, meaning it’s weighted relative to each company’s market capitalization. Market cap is determined by multiplying the number of shares issued by the company’s stock price. The index assigns each company’s weight based on the value of all the shares of stock available. In other words, larger companies in the S&P 500 have a greater impact on the index’s price performance than a company with a comparatively smaller market cap.
For example, a company like Facebook with a current market cap of $572 billion would account for 10 times the weight in the S&P 500 index than a company whose market cap is $57 billion. There’s a constant recalibration of the index driven by the shares that are traded. The S&P 500 is rebalanced quarterly in March, June, September and December.
Since the S&P 500 is weighted by a float-adjusted cap, only those shares available to investors are calculated instead of all of a company’s outstanding shares: Shares held by other publicly traded companies, government agencies or other shareholders are excluded.
What’s the criteria for companies included in the S&P 500?
Like the ever-fluctuating nature of the stock market, the S&P 500 also shifts due to the companies featured in the index’s available shares and stock prices. The S&P Dow Jones Indices committee determines a corporation’s eligibility based on size, industry and liquidity as well as the following criteria: only common stocks (or shares) of U.S. companies are considered, at least 50 percent of the company’s stock has to be available to the public, the U.S. portion of fixed assets and revenues has to be available to the public, the U.S. portion of fixed assets and revenues needs to constitute at least 50 percent, the market cap must be at least $8.2 billion, the company must have positive earnings in four consecutive quarters, including the most recent quarter, stock needs to trade for a reasonable price and the stock must also be listed on the New York Stock Exchange (NYSE), NASDAQ or Investors Exchange (IEX).
What are the top companies in the S&P 500?
There are a wide range of industries within the S&P 500. According to the S&P Dow Jones Indices, the Top 10 companies in the S&P 500 by index weight as of mid-2019 are: Microsoft Corp., Apple Inc., Amazon, Facebook Inc. A, Berkshire Hathaway B, Johnson & Johnson, JP Morgan Chase & Co., Alphabet Inc. C (Google), Alphabet Inc. A (Google), Exxon Mobil Corp.
In terms of the industry sectors encompassed in the S&P 500, the breakdown consists of: Information Technology (30.3%), Communication Services (17.6%), Health Care (14.2%), Financials (11.1%), Consumer Discretionary (9.4%), Consumer Staples (8.4%), Energy (4.5%), and Industrials (4.4%).
How does the S&P 500 differ from other stock market indexes?
There are several key differences between the S&P 500 and other leading stock market indexes like the Dow Jones Industrial Average, popularly known as the “Dow,” and the NASDAQ Composite, which is different from the NASDAQ stock exchange.
The Dow contains stocks from 30 large companies, including 3M, American Express, Apple and Coca-Cola, versus the 500 companies included in the S&P 500 index. Whereas the S&P 500 is market-cap-weighted, the Dow is price-weighted, which means that companies with a higher share price have a greater impact on the index.
Meanwhile, the NASDAQ Composite index includes more than 3,000 stocks traded on the NASDAQ Stock Exchange. Because a major portion of the companies trading on the NASDAQ exchange are tech-focused, looking at the NASDAQ Composite is a good snapshot of what’s occurring in the tech corners of the market. Like the S&P 500, it’s also a market-capitalization-weighted index.
So, how can you make money from the S&P 500?
Though you can’t actually invest in the S&P 500, you can invest in an S&P 500 fund. That’s an investment fund that mimics the performance of the S&P 500, allowing you to simply invest in one fund instead of having to invest in and track 500+ separate stocks.
Famed investor Warren Buffett has even instructed the trustee of his estate to invest 90 percent of his money into an S&P 500 index fund. “Consistently buy an S&P 500 low-cost index fund,” he told CNBC’s On The Money, especially when it comes to boosting retirement savings. “I think it’s the thing that makes the most sense practically all of the time.”
Exchange-traded funds, or ETFs, are another way to track an index like the S&P 500. An ETF is a low-cost, tax-efficient fund that offers another way to stay diversified while investing in the stock market. They can be bought and sold like stocks because they’re traded on stock exchanges.
Whether or not you invest in an S&P 500 fund, the index is viewed as a gauge of the overall health of the U.S. stock market, so it’s worth paying attention to it as an investor.
* Investing involves risk including loss of principal. This information is provided for educational use only and is not a recommendation to buy or sell any specific security or invest in any particular strategy.