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What Is S&P 500?

Adam Lienhard
What Is S&P 500?

The S&P 500 is a stock market index that monitors the performance of 500 large-cap publicly traded companies in the US. Introduced in 1957, the S&P 500 index is now one of the most widely tracked stock market indices worldwide. It includes businesses from various industries and sectors.

How is it calculated?

The index calculates its results using a market capitalization-weighted methodology: Companies with higher market capitalizations impact the index’s performance to a greater extent. 

A committee selects companies based on certain criteria, such as market capitalization, liquidity, and financial viability. A company must meet the index requirements to join the S&P 500 index:

  • It must be listed on the New York Stock Exchange (NYSE) or NASDAQ.
  • It must be American (i.e. have its headquarters and revenue in the US.)
  • It must have a large market capitalization of $11 billion or more.
  • It must have sufficient trading liquidity.

The index is periodically rebalanced to ensure that it continues to represent the overall market.

Which companies are represented in the index?

The companies that represent the largest share in the index are spread across different sectors: technology, healthcare, energy, finance, retail, and basic industries. 

According to the June 2023 ratings, the top 10 names in the S&P 500 index include:

  1. Apple Inc.
  2. Microsoft Corp.
  3. Amazon.com Inc.
  5. Alphabet Inc. (Google)
  6. Meta (ex. Facebook)
  7. Berkshire Hathaway Inc.
  8. Tesla
  9. UnitedHealth Group Incorporated
  10. Exxon Mobil Corporation

How do investors use it?

Investors and financial analysts often use the S&P 500 as an indicator of the US economy’s strength and as a benchmark for investment performance. 

Investors can use the index as a reference point to assess the performance of their investments and make informed decisions about their portfolio allocation.

By investing in an index fund or exchange-traded fund (ETF) that tracks the S&P 500, investors can gain exposure to a range of companies across various industries and sectors, reducing risk and volatility in their portfolio compared to investing in individual stocks.

Why trade the S&P500?

Investing in companies listed in the S&P 500 index can offer several benefits to investors, including:

S&P 500 has high liquidity. The companies listed in the index are large and well-established, with high trading volumes and liquidity. It means you can easily buy and sell shares in these companies without significantly impacting the stock price.

S&P 500 performs well. The index has historically delivered strong profits, with an average annual return of around 10% over the past several decades. While past performance doesn’t guarantee future results, trading S&P 500 can lead to attractive short- and long-term returns.

S&P 500 is popular and widely used. The S&P 500 index is a benchmark for investment performance. You can use it as a reference point to evaluate the performance of your investments.

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