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What is S&P 500?

The Standard & Poor’s 500 Index, better known as the S&P 500, is an index of 500 leading publicly traded companies in the United States.

April 11, 2022

This article is provided for informational purposes only and should not be construed as legal or investment advice. Always consult with a professional financial or investment advisor before making investment decisions.

Investing in the stock market doesn’t need to be complicated, but it’s easy to get caught up in the noise. There are many terms used that may be unfamiliar to new investors, including “S&P 500.”

What is the S&P 500? And why does it matter to investors?

What is the S&P 500?

The S&P 500 is short for “Standard & Poor’s 500 Index.” It’s a stock market index that represents 500 of the largest publicly traded companies in America.

The S&P 500 is widely regarded as one of the best gauges of the performance of America’s largest companies — and by extension, the performance of the entire U.S. stock market. 

Investors may look at the S&P 500 to get an idea of what the overall stock market is doing on any given day, week or year. 

The S&P 500 is also commonly used as an investment benchmark. Investors who try to beat the performance of the stock market will often compare their performance to that of the S&P 500. 

The index was first introduced in 1957 by Standard & Poor’s, a financial data company that’s now known as S&P Global.

What is a stock market index?

The S&P 500 is a stock market index. But what does “index” mean?

A stock market index tracks the movements of stock prices for a basket of stocks. Instead of looking at the price of individual stocks, indexes use the combined data from hundreds of stocks (500, in the case of the S&P 500). 

Index vs. index fund

“Index” is used to describe the data. Indexes are used as indicators and sources of information.

“Index fund” is used to describe a way that investors can buy the index. Index funds are used for passive investing. 

For example, S&P 500 index funds like FXAIX or VFIAX allow investors to directly buy an index. If you buy an S&P 500 index fund, you’ll own very small slices of the 500 different S&P 500 companies. Index funds are a quick and easy way to diversify your investment portfolio.

Why does the S&P 500 matter?

The S&P 500 is important because it represents the performance and economic health of the U.S. stock market. When someone says “the stock market is up 1% today,” they are likely referring to the S&P 500. 

The S&P 500 represents more than 83% of the market capitalization of the total U.S. stock market. 

This means that if every publicly traded company in America were worth a combined $100, at least $83 of that value would be represented in the S&P 500 index. 

Note: There are around 4,000 publicly traded companies in the U.S., and the S&P 500 only includes 500. But because the S&P 500 includes the largest companies, it represents the vast majority of the total value of all U.S. companies. 

What are the S&P 500 companies?

S&P 500 stocks include 500 companies in total. 

However, there are 505 stocks in the index, because some companies have multiple types of stock listed in the index. For example, Google’s parent company, Alphabet, has two classes of shares that are listed separately, and both are part of the S&P 500 index. 

There are many different types of stocks in the S&P 500. You will find “household names” in the index, like Apple, Microsoft, Home Depot, Visa, Coca-Cola, and so on. You will also find lesser-known large companies, like ADM (agriculture), Carrier (industrials), and Humana (health care).

The top 10 S&P 500 companies (weighted by market cap) include:

  • Apple (AAPL)

  • Microsoft (MSFT)

  • Amazon (AMZN)

  • Alphabet A (GOOGL) (Google’s parent company — class A shares)

  • Alphabet C (GOOG) (Google’s parent company — class C shares)

  • Tesla (TSLA)

  • Nvidia (NVDA)

  • Berkshire Hathaway B shares (BRK.B)

  • Meta Platforms (FB) (Facebook’s parent company)

  • UnitedHealth Group (UNH)

The letters in parentheses after the company name represent the stock ticker. This is the code used to look up the company’s financials and to trade shares in that company. 

S&P 500 index weighting

The S&P 500 is a market-capitalization-weighted index. What does this mean?

Market capitalization, or “market cap,” is the total value of a company’s shares. This value is determined by multiplying the current stock price by the number of shares. 

Weighting refers to how the index is constructed. An equal-weighted index of 100 companies would include a 1% allocation to each company (1% x 100 = 100%). 

Market-cap-weighted refers to how the S&P 500 index is calculated. It’s based on a company’s current market capitalization. The S&P 500 is not an equally weighted index. 

For example, at the time of this writing (data changes daily):

  • Apple is the most valuable company in the S&P 500

  • Apple currently has a market cap of $2.66 trillion

  • The total S&P 500 market cap is currently $38.2 trillion

  • Therefore, Apple represents 6.96% of the S&P 500 market cap ($2.66tn divided by $38.2t)

  • Approximately 6.96% of the S&P 500 index is made up of Apple stock

  • If you buy $100 of an S&P index fund, almost $7 of that will go directly into Apple stock

Because the S&P 500 uses a market-cap-weighted approach, larger companies make up more of the index than smaller ones.  

Likewise, stock price movements in larger companies will have bigger effects on the price of the index. 

There are 500 companies in the S&P 500 index. But the smaller firms represent a very small share of the overall index. 

You can see a list of S&P 500 stocks by market cap here.

S&P 500 companies by sector

Another way to conceptualize the S&P 500 is to look at the breakdown of different sectors within the index. A “sector” is simply a way to categorize companies by economic activity. 

The data below shows the percentage of sector weighting (by market cap) from within the S&P 500 index companies. 

  • Information technology = 28.1% 

  • Health care = 13.3%

  • Consumer discretionary = 11.8%

  • Financials = 11.5% 

  • Communication services = 9.6%

  • Industrials = 8%

  • Consumer staples = 6.2%

  • Energy = 3.7%

  • Real estate = 2.6%

  • Utilities = 2.6%

  • Materials = 2.6%

The most recent data is published by S&P Global.

Criteria for S&P 500 stocks

To be included in the S&P 500 index, a company must meet the following conditions:

  • Be a publicly traded U.S. company

  • Have a market capitalization of at least $11.8 billion

  • Be highly liquid (easy to buy and sell shares)

  • Have a public float of at least 10% of its shares outstanding

  • Have positive earnings in the most recent quarter

  • Have positive earnings in the sum of the trailing four consecutive quarters

If a company doesn’t meet all these requirements, it won’t be considered for inclusion in the S&P 500.

And if an existing S&P 500 company fails to continue meeting these criteria, the company may be removed from the index. 

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