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S&P 500 Index: What is it?


One of the most ancient and representative indexes in the U.S. stock market, S&P 500! The full name is Standard & Poor’s 500 or S&P 500 Index, so do you know it?

What is S&P 500?

S&P 500 is the index most investors will refer to, which is launched by Standard & Poor’s Dow Jones Indices on March 4, 1957. The S&P 500 includes the 500 largest companies listed on the U.S. stock exchange, which can be subdivided into 11 sectors: Communication Services, Consumer Discretionary, Consumer Goods, Energy, Financials, Healthcare, Industrials, Materials, Real Estate, Technology and Utilities.
Traders not only use this to track the performance of the entire index, but also the performance of companies in the same industry. In addition, it can reflect the current state of the entire market. The index offers a higher level of diversity than trading single company stocks.

What are the constituents of the S&P 500?

Among them, the constituent stocks of S&P 500 are all well-known companies, such as Apple, Microsoft, Amazon, Tesla, Johnson & Johnson, Meta, Coca-Cola, Walmart, McDonald’s, etc. For more information on the latest S&P 500 constituents, please click me.

How is S&P 500 calculated?

The S&P 500 is calculated using a market capitalization-weighted method, where each company’s publicly traded shares are multiplied by the share price per share to get the company’s market capitalization. Secondly, add all the market capitalizations to get the index market capitalization. Lastly, divide each company’s market capitalization by the index’s market capitalization to get the weighted average for that company. Hence, the greater the weight of a company, the greater the impact of its price movement on the index. The S&P 500 is calculated similarly to other market capitalization-weighted indices such as the UK 100 and Nasdaq.

S&P 500’s constituent picking benchmarks

The stock selection benchmark of the S&P 500 are very strict, so basically the companies that can enter the S&P 500 index are very powerful companies in the United States. Hence, the S&P 500 is also considered to be an indicator that better reflects the US economy.

1. Scale: The company must have an unadjusted market capitalization of at least $8.2 billion (According to stock market volatility)
2. Stock Exchange: Only the company which registered companies that trade common stock on the New York Stock Exchange (NYSE), Nasdaq, Cboe, or IEX
3. Liquidity: At least 50% of the company’s shares must be available for public trading, there is also a minimum liquidity requirement, which is the annual trading volume must be greater than its total market capitalization
4. Financial Status: Businesses include total profits for the first four quarters and the most recent quarter was positive earnings
5. Launch time: Newly listed companies need to trade for a year

The constituent stocks of the S&P 500 are selected and replaced by a committee. The committee consists of 9 members, all full-time S&P Global employees, who meet monthly to discuss revisions to the S&P 500 and other indices. They will add or remove the stocks as the rules change, adjusting the company’s weight in the index. Due to overall market reasons, such as the impact of the COVID-19 in 2020, it is difficult for many companies in the S&P 500 to meet these conditions. However, the S&P 500 said that for infrequent changes in the constituent stocks, it will not immediately remove these companies, unless the fundamentals of these companies are considered to be continuous deterioration. These adjustments may be very subjective, not as mechanical as other passive investing funds and trackers.

The difference between the S&P 500 and the Dow Jones

Although the Dow Jones Index is the most familiar to most investors, considering the breadth and depth of the index weight stocks, the S&P 500 Index, whose constituent stocks account for about 77% of the total market value of the U.S. stock market, is actually larger than the Dow Jones Index (which only accounts for the 24% of the total U.S. stock market value), is more representative of the economic prospects of the United States. Hence, S&P 500 is the best index to invest in U.S. stocks.

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Disclaimer: Information above can only be use for references and doesn’t represent our platform’s opinions.

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