What is S&P 500?
The S&P 500 is a market-cap weighted stock index constructed to track the share price performance of the top 500 large-cap U.S. equities.
Established in January 1993, the S&P 500 Index is designed to measure the performance of the large-cap, publicly-traded companies in the U.S. equities market, which serves as a “proxy” for the current state of the financial markets, including the broader economy.
Table of Contents
- How Does the S&P 500 Index Work (SPX)?
- SPY Stock: Market Index Fund (ETF)
- S&P 500 Structure: Market Cap-Weighted Index
- What is the SPDR S&P 500 ETF Trust?
- What is SPX Index?
- What is the Criteria for Inclusion in the S&P 500 Index?
- SPX Index: Which Companies are in the S&P 500?
- S&P 500 Index ($SPY) vs. Dow Jones Index ($DJIA): What is the Difference?
- S&P 500 Index ($SPY): Sector Breakdown Weightings Chart
- SPY Stock Index: What is the S&P 500 Today?
- S&P 500 Index YTD Price Performance Chart (2023)
- What are the Drawbacks to S&P 500 Index ($SPY)?
How Does the S&P 500 Index Work (SPX)?
The S&P 500 Index, or “Standard & Poor’s 500 Index”, is a widely recognized barometer of the U.S. public equities market and the broader economy.
The S&P 500 is a stock market index composed of ~500 of the leading publicly-traded companies.
Hence, the S&P is frequently used as a benchmark (“hurdle rate”) for investors to attain excess returns over, e.g. hedge funds often compare their returns to the S&P 500’s return to assess their relative performance.
S&P 500 Index Characteristics
- Weighting Method → Float-Adjusted Market Cap Weighted
- Rebalancing Frequency → Quarterly Basis (March, June, September, and December)
- Index Launch Date: Mar 04, 1957
- Number of Constituents → 503 Companies
The current state and recent performance of the U.S. financial markets are often analyzed using the S&P 500 index as a proxy to understand the prevailing economic conditions and near-term outlook.
Constructed on a market capitalization-weighted basis, the S&P 500 index designates a percent weight to each constituent based on the value of its equity – otherwise known as their market capitalization (or “market cap”).
Learn More → S&P 500 Index Methodology Factsheet (Source: S&P 500)
SPY Stock: Market Index Fund (ETF)
The SPDR S&P 500 ETF Trust, which trades under the ticker symbol “SPY”, is a float-adjusted market capitalization weighted index.
In a capitalization-weighted index – such as the S&P 500 (SPY) – each constituent is weighed relative to the collective total market capitalization of all parties, which causes the distribution of influence to be distorted.
The composition of the S&P 500 index is determined by a committee based on stringent criteria, including their market value of equity, liquidity (i.e. cash on hand), and ensuring fair representation of all industries (or sectors) in the markets.
The S&P 500 is widely regarded as the leading gauge for the performance of large-cap U.S. equities, which is the reason for its common use in intrinsic value techniques, namely the discounted cash flow (DCF) model, i.e. the terminal value growth rate.
SPY Stock Price on November 9, 2023 (Source: Google Finance)
S&P 500 Structure: Market Cap-Weighted Index
The S&P Index 500 index is structured as a capitalization-weighted index, or “market cap weighted index”, where the individual constituents that comprise the index have a percent contribution based on their total market capitalization, i.e. equity market.
The S&P 500’s value is calculated based on the market cap of each company, which is equal to the share price of the company multiplied by the total number of shares outstanding.
The share count is adjusted to consider only the shares available to be traded in the open markets.
Since market capitalization is adjusted for the shares available for trading, the S&P is considered a float-weighted index – i.e. it accounts for only the shares that can actually be traded in the market.
Each company in the S&P 500 index is weighted differently based on their respective market capitalization, which can be calculated by dividing the company’s market cap by the total market cap of the S&P 500.
Therefore, companies with larger market caps are weighted more heavily – meaning their positive/negative share price movements are much more impactful on the broader index.
This is very important and educational experience for me thank you
Hi, Jubi,
You are very welcome, and we are glad to hear it!
BB