S&P 500 definition

What is the S&P 500?

The S&P 500 is one of the most widely followed stock market indices in the United States and the world. It’s a market capitalisation weighted index that tracks the performance of the 500 largest public companies listed on US stock exchanges.

 

S&P 500 key features

The S&P 500 is considered a key benchmark for the US stock market and is often used as a gauge of the overall health and performance of the economy. Here are some important characteristics and details about the S&P 500.

Composition: the S&P 500 is composed of 500 large-cap U.S. companies from various sectors of the economy. These companies are selected based on specific criteria, including market capitalisation, the liquidity of their stock, and industry representation. The goal is to provide a diversified cross section of the US stock market with a single snapshot.

Weighting: companies within the S&P 500 are weighted based on their market capitalisation, which is calculated by multiplying the stock’s current market price by the total number of shares in the market. This means that larger companies have a more significant impact on the S&P’s price.

Diverse representation: the index covers a broad range of sectors, including technology, healthcare, financial services, consumer goods, and more. This diversity helps reduce the impact of sector-specific events on the S&P 500’s overall performance.

Continuous rebalancing: the composition of the S&P 500 is regularly reviewed and rebalanced to ensure it remains representative of the evolving stock market. Companies can be added or removed from the index as their market capitalisation and importance change.

Read up on rebalancing

Market indicator: the S&P 500 is widely used as a benchmark to measure the performance of investment portfolios, tracker funds, and exchange traded funds (ETFs). It is also used as an indicator of overall market sentiment and US economic health (if the S&P 500 is rising, market sentiment is positive. If it’s falling, the opposite is true).

Learn more about market performance and your investments

Investment products: many financial products (including tracker funds and ETFs) are designed to replicate the performance of the S&P 500. Investors can buy ‘units’ (think of these as being similar to shares) in these funds to gain exposure to the S&P’s returns.

Historical data: the S&P 500 has a long history dating back to its inception in 1957. It is often used to analyse long-term trends in the US stock market and to study the effects of various economic events and policy changes.

 

The S&P 500 is one of three main stock market indices in the US. The other two are the Dow Jones Industrial Average (DJIA) and the Nasdaq, each of which has its own unique characteristics and criteria for including companies.

But, investors often use the S&P 500 as a reference point for evaluating the performance of their investments and for making decisions about changing the asset allocation in their portfolios.