What is the S&P 500 Index?

Published by Thomas Herold in Economics, Investments, Trading

'S&P 500 Index' is explained in detail and with examples in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

The S&P 500 Index refers to a world famous American stock market index. It is comprised of 500 stocks today which analysts and investors view to be the leading indicator for American stocks and equities. They call this the mirror of the large cap world performance. Economists are the ones who select the components of the S&P 500.

The S&P 500 Index itself proves to be weighted based on market value. It is among the three most significant benchmarks of the American stock markets along with the Dow Jones Industrial Average and the NASDAQ Composite. There are also various other lesser known S&P indices which focus on either mid cap firms or small cap companies which boast lower market capitalizations of from $300 million to $2 billion. A wide range of investment products exist that trade on the S&P 500. Among these are both ETF exchange traded funds and index funds in which investors can speculate or invest.

Most investors consider the S&P 500 Index to be the most crucially accurate measurement of the large cap American equities performance. It is true that this index only concentrates on the bigger capitalized portion of the stock markets. Yet it is deemed to be representative of the overall market simply because it covers a substantial part of the entire U.S. stock market value.

It is the S&P Index Committee that picks out the 500 constituents of this index. This committee is comprised of a team made up of economists and analysts who work for Standard & Poor’s. The professionals in this group contemplate a number of different characteristics when they decide on the 500 constituent companies that make up the index. Some of the most important considerations are liquidity, market size, and grouping of their industry.

In recent years, the S&P 500 Index has become so widely followed and popular that it has surpassed the DJIA Dow Jones Industrial Average as the preferred benchmark metric of United States’ stocks. Part of the reason for its inevitable success is that the S&P 500 includes an impressive and more representative 500 different American firms versus the only 30 companies in the Dow Jones Industrials.

Besides this, another major difference exists between the two popular indices. While the S&P 500 employs a market capitalization methodology that delivers greater weight to bigger companies, DJIA utilizes a different price weighting procedure that provides greater weight to stocks which are more costly by price. Many economists and investors consider the market cap weighting method to be more true to life of the way the market itself functions.

It is difficult for individual investors to personally duplicate the S&P 500 alone. This is because the portfolio would require for them to purchase stocks from fully 500 individual companies in set quantities in order to replicate the methodology for the index. This is why it is so much easier for investors to simply buy into one of the good S&P 500 products. Some of these are the SPDR S&P 500 ETF, the Vanguard S&P 500 ETF, and the iShares S&P 500 Index ETF.

There are other S&P indices in the S&P 500 Index family. The 500 index is also a member of the S&P Global 1200 family. Besides this, there are the popular indices including the S&P Small Cap 600 Index with its smaller capitalization firms, the S&P Mid Cap 400 Index with its mid cap corporations, and the composite of the three S&P 500, 600, and 400 indices— the S&P Composite 1500 Index.

The original name of the S&P 500 Index was the Composite Index. This arose in 1923 to track a small group of American stocks. Standard & Poor’s expanded the index in 1926 to 90 stocks and finally to the present 500 in 1957.

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The term 'S&P 500 Index' is included in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.