- S&P 500 is a financial market index containing the 500 of the biggest US companies from over 11 industries.
- To be a part of this index, a company needs a minimum market capitalization of $8.2 billion.
- In the last century, the average return of S&P was 10%, though market return varies over time.
A stock market is a vast place where it can often be complicated to know how it performs. Various market indexes play a vital role here to help traders and investors gauge the overall market return. S&P 500 is one of such indexes. It consists of a list of the 500 biggest conglomerates in the market from over 11 industries.
If you are an investor or trader who is looking to keep track of how the U.S. economy and the companies based in it are doing, then you should definitely follow this index.
Dive into the pool of S&P 500
You must be wondering that if S&P is a part of the stock market, you can probably buy it. Let us take you in the right direction. S&P 500 is not a firm or a company or a stock, rather it is a group of companies. This list is also called an Index and while you can not directly invest in S&P 500, you can definitely purchase shares from this index.
Let’s have a look at some popular funds that track S&P 500. This is a great way to enter the market and taste the rush of stocks and other trading activities.
- T. Rowe Price Equity Index 500 Fund (PREIX)
- Vanguard 500 Index Investor Shares (VFINX)
- Fidelity 500 Index Fund (FXAIX)
- Schwab S&P 500 Index Fund (SWPPX)
S&P 500 Companies
A company can be a part of this index only if it passes certain criteria that are declared by S&P 500. These include,
- Be a part of a qualified U.S. exchange.
- If a company wants to be listed, it should be based in the U.S.
- The company needs to have a structure of a corporation and issue common stock.
- The firm needs to have a market capitalization (the value of the outstanding shares of a company) at a minimum of $8.2 billion.
- Have a positive profit cash flow that is as-reported for the recent quarter added with four most recent quarters.
The fruition of these rules results in allowing only the biggest and most successful corporations to be a part of the S&P 500. This list is updated quarterly.
How is S&P 500 calculated?
This index tracks the market cap as well as the value of its 500 renowned companies. But how is market capitalization calculated? Well, it’s done by multiplying the outstanding number of shares for a company by its current stock price. Let’s understand it through an example. Suppose, a company has $1 million shares outstanding and its current share price is $3, the market cap for that company will be $3 million.
The value of the S&P 500 is calculated on the basis of the market capitalization of each listed company. The value is adjusted considering only the publicly traded shares. Each company also has a unique weighting that is calculated by dividing the companies’ individual market cap by the total market cap of the S&P 500. Let’s take a sneak peek at the most highly weighted companies.
- NVIDIA Corporation
- Apple Inc.
- Microsoft Corporation
- Amazon.com Inc.
- Alphabet Inc. Class A
- Facebook Inc. Class A
- Alphabet Inc. Class C
- Berkshire Hathaway Inc. Class B
- Tesla Inc.
- JPMorgan Chase & Co
Wondering why this weight is needed? The stock market can often be hard to track and weights help in presenting a clearer picture of the current scenario of the stock market performance.
This weightage further helps in tracking the fall or rise in prices of particular stocks on the overall market return. For example, if the stock of Microsoft fades even by 10% it would mean that there is going to be a loss of over billions of dollars. In contrast, the fall in the price of GAP, a clothing retail company, the price of GAP would only mean a loss of a few million dollars. However, Microsoft can cause an economic ruckus because of its status or weight.
Is there any other index like S&P?
Dow or DJIA, also known as Dow Jones Industrial Average is also an index that is almost similar to the S&P 500 and lists the conglomerates. However, there are some key differences that separate both.
- As opposed to the 500 companies listed in S&P 500, the Dow consists of only 30 companies that are leading the game in their respective industries.
- The Dow represents only 9 industries while S&P 500 represents 11.
- Here the weight is assigned according to the share price of the individual firms. This index is calculated by combining the share price of 30 companies, adjusting them by weight, and dividing them by Dow divisor which is a predetermined constant.
How much return can you expect from S&P 500?
The average market return cannot be expected to rack up a lot of profit for you unless you are going with a mindset to invest in the long run. For S&P 500 it has been on an average of 10% since the last century. However, this is not a fixed rate.
To explain it in a clearer sense, In 2008, S&P 500 ended 37% down. The year after that it finished 26% up. In the market, you cannot always hope to derive profits at a high percentage unless in the long run. The market has risks and you should be willing to accept that volatility.