The Standard and Poor’s 500 (or more commonly known as the S&P 500) is a stock market index made up of 500 leading companies publicly traded in the U.S. stock market.
The companies are selected by Standard and Poor’s Index Committee and the index is designed to be a leading indicator of the US equities market.
Many people agree that the S&P500 index is a better representation of the US market as it contains 500 large, blue-chip companies compared to the Dow Jones’ 30.
Companies in the S&P 500 Index
The S&P 500 contains all of the stocks in the Dow Jones with an additional 470. Some notable stocks in this additional 470 include:
|Apple Inc.||Oracle Corp.||Bank of America Corp.|
|Google Inc.||QUALCOMM Inc.||Berkshire Hathaway Inc.|
|Wells Fargo and Co.||Citigroup Inc||Kraft Foods Inc.|
|Microsoft Corp.||PepsiCo Inc.||Comcast Corp.|
Google and Apple, who do not feature in the Dow Jones due to their large stock prices, are key components of the S&P500. They are heavily weighted but due to the size of the S&P they do not dominate it like they would the Dow. The S&P is made up of companies from a wide array of industry sectors. Below we see the weightings of each sector (accurate as of August 2013):
Admission to the S&P 500 Index
A company will be considered for admission to the S&P500 when its market capitalization is within the top 500 in the US. In addition to this the S&P admissions board will consider several other criteria:
- Minimum market capitalization of $4 billion
- Sufficient amount of shares in public hands
- Liquidity – minimum trading volume of 250,000 shares each month before evaluation
- Correct sector classification
- Listed on NYSE or NASDAQ exchange
- Sufficient length of time on this exchange
- Financial viability of the firm When a company is added to the S&P we usually see the share price of that company rise as managers of index funds will normally purchase that company’s stock in order to continue tracking the S&P500.
Weighting of the S&P500
The weighting-method used by the S&P500 differs from the Dow in that it weighs companies according to their overall market capitalization.
Market capitalization therefore gives a better gauge of the overall size and value of a company rather than just taking the price of each share. The S&P500’s capitalization-weighted method is also float-weighted which means that it only takes into account the number of shares available for public trading between institutional and retail investors. It therefore excludes any shares that are tied up in the company itself or any government holdings.
Calculation of the S&P 500 Index
Just like the Dow Jones the S&P500 is calculated using a divisor set by Standard and Poor’s. The calculation of the index adds all market capitalizations for each of the 500 companies and divides the sum by this divisor. So for example, if the market cap of the 500 stocks came to $13 trillion and the divisor is set at 8.9 billion we would have an S&P index value of 1,460.67.
This divisor is adjusted in the case of stock issuance, mergers, change of companies in the index amongst other corporate actions to ensure that such events do not significantly alter the value of the index. However, unlike the Dow Jones, it does not adjust its divisor on the back of a stock split because the market capitalization of the company will remain the same.
The Value of the S&P 500
Just like the Dow Jones, the S&P hit an intra-day high of 1,552.87 in March 2000 at the height of the dot-com bubble. We then saw it decline drastically by over 50% to 768.63 during the stock market downturn of 2001/2002 due to the dot-com bubble bursting along with political and social adversities such as 9/11 and the Afghan and Iraq Wars.
During the boom of the mid 2000s we saw the S&P soar once more and it hit a new record high with a close of 1,565.15 on October 9th 2007. The market began to decline from this peak on the back of the financial crisis. It hit its lowest point in 13 years on 9th March 2009 closing at 676.53.
In 2013 we have seen the S&P500 rise by more than 25% on the back of QE3 – the Federal Reserve’s third round of quantitative easing which sees $85bn a month being printed to buy mortgage-backed securities and treasury bonds. This monetary policy has seen stock prices rise drastically in value.
On September 19th 2013 we saw the index hit its all-time record high closing the day at 1,725.52.