What is the S&P 500?

If you’ve ever watched financial media during the day, you’ve likely seen a little ticker somewhere on the television listing quotes for the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite. These are the three major stock indices in the United States, acting as proxies for the market as a whole. While other more diverse indices can be tracked and purchased, these are the big three.

The one often recognized as the ‘true’ barometer of the stock market is the S&P 500, a market cap weighted index featuring the 500 largest, publicly traded companies in the US. The companies in the index change frequently, but the S&P 500 remains the bedrock of millions of retirement portfolios across the country.

Why the S&P 500 Matters

The S&P 500 consists of the 500 largest American public companies, weighed by their market capitalization. A company’s market capitalization is the total value of all outstanding shares combined. To find the market cap of a specific company, you simply multiply the stock price by the number of shares. The higher the market cap, the more weight the company holds in the S&P 500 index.

For example, the largest company by market cap in the US is currently Apple Inc. at around $2.5 trillion. Apple is the heaviest weighted company in the S&P 500, followed by Microsoft ($2.2 trillion), Google ($1.9 trillion), and Amazon ($1.7 trillion). The weights of these companies change frequently as their market cap rises and falls.

The S&P 500 is often considered a proxy for the US stock market as a whole since it contains the majority of tradable large cap American stocks. Smaller companies are included in the index’s cousin the S&P 600. Many investors prefer the S&P 500 to the Dow Jones Industrial Average since the Dow only contains 30 stocks and weighs them based on stock price, not market cap. The Nasdaq 100 is another commonly used index to track the market, but it’s heavily skewed toward high growth tech stocks. The S&P 500 is diversified across multiple sectors and better encompasses the variety of the American economy.

Components of the S&P 500

Unlike the rest of the US stock market, the components of the S&P 500 aren’t automatically chosen based on market cap. Instead, the 500 companies are selected by a committee and stocks are added and booted frequently. The S&P 500 uses 500 companies as a proxy, but the index actually consists of 504 stocks since four companies have two different share classes: Google (GOOG and GOOGL), Under Armour (UAA and UA), Discovery (DISCA and DISCK), Fox Corp (FOX and FOXA). Comcast used to also have 2 share classes in the index, but retired the CMSCK shares.

In order to be selected for the S&P 500, certain requirements must be met. Only stocks meeting the following criteria can be included in the S&P 500:

  1. Market capitalization of more than $13.1 billion
  2. Share price over $1.00
  3. Must have more than 250,000 shares traded per month over the preceding six months
  4. Located in the United States
  5. Must be listed on the New York Stock Exchange or NASDAQ Stock Exchange

Additionally, only common stock can be included in the S&P 500. Securities like preferred shares, master limited partnerships, closed-end funds, ETFs, and mutual funds cannot be included in the index. The committee that decides which stocks to include meets quarterly, although adding and bumping stocks occurs less frequently.

Disclosures

The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Stock investing includes risks, including fluctuating prices and loss of principal.