Oct 9, 2022

What is the S&P 500 and How Does it Work?

When it comes to the major U.S. stock indexes, the S&P 500 index is seen as the best indicator of how the stock market as a whole is doing and how well large corporations are doing. So, here's what all investors should know about the S&P 500 index!

What is the S&P 500 and How Does it Work?

The S&P 500 is an index of 500 large-cap U.S. corporations' equities on the stock market. By reporting the risks and returns of the top corporations, it depicts the performance of the stock market. It serves as the market's standard against which all other investments are measured by investors. The initials S&P stand for Standard and Poor, the two original banking institutions. Standard & Poor formally unveiled it on March 4, 1957. It was bought by McGraw-Hill in 1966. As of 2022, it will be owned by the S&P Dow Jones Indices, a joint venture between News Corp, the owner of Dow Jones, CME Group, and S&P Global (previously) McGraw Hill Financial.

What is the S&P 500 and How Does it Work?

The S&P 500 is an index of 500 large-cap U.S. corporations' equities on the stock market. By reporting the risks and returns of the top corporations, it depicts the performance of the stock market. It serves as the market's standard against which all other investments are measured by investors. The initials S&P stand for Standard and Poor, the two original banking institutions. Standard & Poor formally unveiled it on March 4, 1957. It was bought by McGraw-Hill in 1966. As of 2022, it will be owned by the S&P Dow Jones Indices, a joint venture between News Corp, the owner of Dow Jones, CME Group, and S&P Global (previously) McGraw Hill Financial.

Understanding Stocks for Beginners

What is an Index?

Despite the fact that experts frequently refer to "the stock market" as if it were a single large entity, it is actually merely a collection of each individual stock. There are roughly 4,000 publicly traded corporations in the United States as a result (or more, depending on how you count). Measuring the performance of a select few stocks rather than all of them makes it easier to obtain an understanding of how the stock market as a whole is doing (similar to how political pollsters survey a few thousand voters, instead of millions of them, to find out how candidates are doing).

A market cross section, like the S&P 500 index, can be used to gauge how the market as a whole is performing. It's a fairly reliable indicator because it covers such a wide range of equities and because they frequently move in tandem, rising and falling at the same time.

How the S&P 500 Works

The S&P 500 keeps track of how much each company in its index is worth on the stock market. Market capitalization is the total value of all of a company's shares of stock. It is worked out by multiplying the number of shares by the price of each share. 

For example: A company with a market capitalization of $100 billion is represented 10 times as much as a company with a market capitalization of $10 billion. Each of the 500 firms in the index is chosen by a committee based on its liquidity, size, and sector. Every three months—in March, June, September, and December—the index is rebalanced.

For a company to be eligible for the index, it must be based in the United States and have a minimum unadjusted market capitalization of $13.1 billion. The public must be permitted to purchase at least half of the corporation's equity. It must have a minimum share price of $1. It has to submit an annual 10-K report. Its fixed assets and revenue must be sourced from the United States to at least 50%. Finally, it needs to have generated positive earnings for at least four straight quarters.

Pink sheets listings and over-the-counter trading are not permitted for the stock. It must be traded on the Nasdaq, BATS Global Markets, Investors Exchange, or New York Stock Exchange.

What Type of Companies Are in the S&P 500?

For a company to be on the index, it must meet certain requirements. Companies must do a number of things, such as:

  • Have a market capitalization of at least $8.2 billion. This is the value of all the outstanding shares of the company.
  • Have their home in the U.S.
  • Be set up as a company and give out common stock.
  • Be listed on a U.S. exchange that lets you. (REITs, which stand for real estate investment trusts, can be added.)
  • Have positive earnings reported for the most recent quarter and for the last four quarters when added together.

Because of this, only the largest and most stable companies in the country can be in the S&P 500. The list is looked at and changed every three months.

  1. Apple (AAPL): 6.99%
  2. Microsoft (MSFT): 5.63%
  3. Amazon (AMZN): 3.32%
  4. Tesla (TSLA): 1.96%
  5. Alphabet Class A (GOOGL): 1.93%
  6. Alphabet Class C (GOOG): 1.71%
  7. Berkshire Hathaway Class B (BRK.B): 1.59%
  8. UnitedHealth Group (UNH): 1.54%
  9. Johnson & Johnson (JNJ): 1.39%
  10. Exxon Mobil (XOM): 1.36% 
  11. JPMorgan Chase (JPM): 1.01%
  12. Meta (META), formerly Facebook, Class A: 1.01%
  13. Visa Class A (V): 0.98%
  14. Procter & Gamble (PG): 0.97%
  15. NVIDIA (NVDA): 0.96%
  16. Home Depot (HD): 0.96%
  17. Chevron Corporation (CVX): 0.93%
  18. Eli Lilly (LLY): 0.84%
  19. Mastercard Inc. Class A (MA): 0.82%
  20.  AbbVie Inc. (ABBV): 0.81%
  21. Pfizer (PFE): 0.77%
  22.  Merck (MRK): 0.76%
  23.  PepsiCo (PEP): 0.73%
  24.  Bank of America (BAC): 0.71%
  25. Coca-Cola Company (KO): 0.70%

How Do You Buy S&P 500 Stocks?

You can't put money directly into the S&P 500, but you can put money into individual companies that are in its index. You can also invest in S&P 500 index funds, which are designed to closely track the performance of the S&P 500. In fact, this is one of the best ways for people who are new to the stock market to start out. Some of the most popular index funds that follow the S&P 500 are listed below:

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

Are you ready to start to invest? Speak with the experts at Vincere Wealth today!

How to Use the S&P 500 to Make Money?

Since the S&P 500 only looks at U.S. stocks, keeping an eye on foreign markets, such as China and India, may help give a more global picture. You could also put a small amount of your money into commodities like gold, which might keep more of their value when stock prices go down.

Read more:  6 Biggest Myths of Investing

In addition to watching the S&P 500, you might also want to watch the bond market. Bonds also get credit ratings from Standard & Poor's. Bond prices tend to move in the opposite direction of stock prices, but that's not always the case. Bond prices and stock prices can sometimes go up and down. 

Bonds come in many different forms. There are Treasury bonds, corporate bonds, and municipal bonds. Some of the money that keeps the U.S. economy running smoothly comes from bonds. Bonds can also change the interest rates on mortgages.

Ready to get started? Speak with an advisor today to find out where the best place to invest your money is. Start building that wealth!

The S&P 500 Competitors

1. The Dow Jones Industrial Average vs. the S&P 500

The Dow Jones Industrial Average is often used as a standard for the U.S. stock market (DJIA). Given its depth and breadth, the S&P 500 is often the index of choice for institutional investors, while the DJIA has traditionally been linked to large stocks from the point of view of retail investors. Institutional investors think that the S&P 500 is a better representation of U.S. stock markets than the Dow, which only has 30 stocks. This is because the S&P 500 has 500 stocks from all sectors, while the Dow only has 30.

Also, the S&P 500 uses a market-cap weighting method, so companies with the biggest market caps get a bigger share of the index. The DJIA, on the other hand, is a price-weighted index, so companies with higher stock prices get a bigger share of the index.

The market-cap-weighted structure is more common in U.S. indexes than the price-weighted structure.

2. Nasdaq vs.  the S&P 500

Nasdaq is a global electronic exchange where securities can be traded. Stocks trading on Nasdaq are included in a number of equity market indices. Keep in mind that a certain stock that is part of the S&P 500 Index might also be in one or more Nasdaq indices.

The Nasdaq 100 Index, which contains 100 of the biggest, most actively traded common stocks listed on Nasdaq, is one of the most monitored Nasdaq stock indices:

3.  Russell Indexes vs. S&P 500

The S&P 500 belongs to a group of indices developed by Standard & Poor's. The Russell index family and the Standard & Poor's set of indices are similar in that, unless otherwise noted, both are market-cap-weighted indices.

The S&P and Russell family of indexes are constructed differently, but, in two significant ways:

  • Russell indexes employ a formula to select stocks to include, Standard & Poor's uses a committee to select constituent companies.
  • Whereas Russell indexes will contain the same business in both the "value" and "growth" style indexes, there is no name overlap inside S&P style indices (growth versus value).

4. Vanguard 500 Fund vs. S&P 500

The Vanguard 500 Index Fund invests its entire net asset base in the equities that make up the index and holds each component with about the same weight as the S&P index in order to mirror the price and yield performance of the S&P 500 Index. In this sense, the fund closely resembles the S&P, which is what it was intended to do.

Wrapping Up

The Standard and Poor's 500, or S&P 500, is a stock market index that tracks the stock performance of 500 large U.S. companies that are listed on stock exchanges. It is one of the most watched stock market indices.  

Fun Fact: More than $8 trillion is indexed to the S&P—including through ETFs, index funds, and private investment vehicles that track the index.

If you have any questions, please feel free to reach out to the team at Vincere Wealth.

Josh Bennett

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