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Index SP 500
24 Sep 2020

S&P 500 Index: What is it Used for?

Knowing how the market behaves at any point in time, is a key aspect to successfully trade. For this reason, it’s important to introduce indexes, like the S&P 500. These indexes help us identify the evolution and the behaviour of a specific financial asset.

In other words, indexes provide values that continuously update market activity, specifically that of a country, a geographical area or specific economic sector. When the price of an asset is falling or rising by a set percentage, we are necessarily implying that there has been a change in the index’s number for that market area.

In this post, we will explain in detail the S&P 500 index, one of the most important numbers in the world of finance.

 

What is it?

The S&P500 is an acronym for Standard & Poor’s 500. It’s one of the most important indexes in the United States and is therefore considered the most relevant index in determining the overall well being of a country or market.

The S&P 500 considers unemployment levels of 500 companies in the United States, including organizations in 11 sectors of the economy. The objective of the index is to come up with a biannual picture of financial markets in the US and of the economy in general.

It’s fundamental to become accustomed with this and other indexes if your aim is to pursue and learn trading from zero.

 

Companies included in the S&P 500

For a business to become eligible for the S&P 500 calculation, a number of criteria need to be satisfied.

  •       The total number of assets in circulation needs to be worth at least 8,2 million dollars.
  •       It must have headquarters in the USA.
  •       It needs to be founded as a corporation and offer shared assets.
  •       It needs to be featured in an exchange list recognized by the US, such as the REIT (Real Estate Investment Trust).
  •       It needs to have positive earnings reported in the most recent quarter.

Because of these requirements, only the largest and more established companies can be included in the S&P 500. The list is reviewed and updates every trimester.

Here are the 10 most weighted companies currently in the S&P 500 Index during the most recent quarter (List as of July 20, 2020).

  •       Apple Inc. 
  •       Microsoft Corporation 
  •       Amazon.com Inc.
  •       Facebook Inc. Class A
  •       Alphabet Inc. Class A
  •       Alphabet Inc. Class C
  •       Johnson & Johnson
  •       Berkshire Hathaway Inc. Class B
  •       Visa Inc. Class A
  •       Procter & Gamble Company

 

Only 86 of the 500 original founding companies of the S&P 500 will be included in the 50-anniversary edition of the index.

 

What does the S&P 500 Measure?

The S&P 500 tracks the financial market capitalization of approximately 500 companies included in the index. Specifically, it captures the value of the shares as time progresses.

The formula for calculating the market capitalization is as follows:

Number of outstanding shares per company * current price of its shares.

For example, assume there is a company with 1 million outstanding shares and that the current price for each share is $5. The market capitalization for this company is $5 million dollars. In other words, this company has a value of $5 million dollars.

 

What is the difference between S&P 500 and the Dow Jones?

The DJIA (Dow Jones Industrial Average), commonly referred to as the Dow, is another stock index that includes large and established companies in the financial markets. However, there are some key differences between two indexes:

  1. The Dow consists of just 30 companies each of which is considered a leader in its respective industry.
  2. The Dow is weighted based on each company’s share price, not market capitalization, which means that companies with higher share prices carry more weight.
  3. The index is calculated by adding the stock prices of the 30 companies, adjusted based on asset weight, and then dividing by the predetermined constant called the Dow Divisor.
  4. The Dow represents 9 sectors, compared to the 11 found in the S&P 500.
  5. Both the S&P 500 and the Dow include companies that are considered the most prosperous businesses in the country.

 

The S&P 500 Today

The table below shows the evolution of the S&P 500 index in the last 5 years. Overall, the index has risen over time, despite some year-on-year declines. A very striking fall in the index was caused by the current Coronavirus Pandemic. As of March 20, 2020, the index had lost almost everything it had gained since December 2018.

investing-The-S&P-500-Today

Are S&P 500 Shares Tradable?

The S&P 500 is not a company per se, but an aggregation of companies making it an index. So, while you can’t directly buy stocks of S&P 500, you can trade stocks of an index that tracks the S&P 500.

In fact, this is one of the best ways for beginning traders to familiarize with the stock market. Here are some of the most popular indexes that directly track the S&P 500 activity:

  •       Vanguard 500 Index Investor Shares (VFINX)
  •       Fidelity 500 Index (FXAIX)
  •       Schwab S&P 500 Index Fund (SWPPX)
  •       T. Rowe Price Equity Index 500 Fund (PREIX)

 

In Summary

The S&P 500 index is considered to have the greatest global representation, from a sectorial point of view as well as market scenario, in terms of equities.

It is a reference for worldwide indexes and is therefore one of the most followed by investors. Both for those who have just started their journey in the world of trading and by those who have been training and investing for many years.

 

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