What is the S&P 500 Index?
Contents
The S&P 500 is the name for an index of 500 of the largest and most high performing companies that are listed on the US stock exchanges. S&P itself stands for Standards & Poors which are the names of the two founding financial institutions which make up this index. As an index, it is considered to be the best measure of how well the US stock market is performing. It is also considered to be one of the world’s most important and closely followed indices.
The S&P 500 is often used as the benchmark by which other investments are compared. In terms of getting a foothold into the leading US stocks you would have to buy stocks in 500 companies to have the same kind of exposure as investing directly in this index.
The S&P 500 index came into being in 1957 and was set up to follow the stock value of America’s 500 largest and high performing companies. In its first decade, the performance index of the S&P rose to 700, demonstrating the strong recovery of US companies and the economic boom that followed WWII.
What does the S&P 500 index actually measure?
The S&P 500 index measures the value of stocks of the 500 largest US corporations registered on the New York Stock Exchange, or NYSE. The NYSE is in terms of capitalization the largest stock exchange in the world.
It measures the publically issued stock of these companies, any private placements are excluded. By reporting the risks and returns of the biggest companies, in this way it represents the overall performance of the stock market.
The 500 members of the S&P 500 index are held on the NYSE’s affectionately named “Big Board”.
The S&P 500 is known as a free-float MCWI or to give it its full name, a free-float market capitalization-weighted index. The MCWI measures the stock values of the top 500 companies and the greater the value of each company, the greater its effect on the index. The S&P 500 is the most widely known and followed of these types of indices.
Another way to describe it is, that the better a company's stock performs, the more it will impact the S&P 500's overall return. It is often very common that the index return is mostly moved by the stocks of only 50-70 of the members that make up the S&P 500. A smaller level of equity has a lesser influence. The bigger influence happens with the taking away or adding of one large stock.
Which companies are listed on the S&P 500 Index?
It’s difficult to give a definitive list of who makes it to the NYSE “Big Board”. In basic terms it’s the darling industries of today. For example, Apple.inc, PepsiCo, Microsoft Corp, J P Morgan Chase & Co. Not always but often household names and history indicates that the list will refresh itself approximately every 10 years.
This doesn’t mean that the stocks currently listed today will all fall from favor within the next 10 years. But some will go and others will stay. However, as leavers depart, there are always new entrants who are ready to knock on the door.
How do I invest in the S&P 500 index?
Direct investment on the index is not possible, but there are facilities available that enable a mimicking of its performance. These are called an index fund, and have been specifically designed to shadow the movement of the S&P 500 itself.
These are index funds, known as S&P 500 index funds which are available through all major and reputable Brokers. These track the performance of the S&P 500.
This type of fund acts as the investment media and achieves this goal by way of a mutual fund or an exchange traded fund (ETF). It invests in the 500 member stocks of the S&P 500 index, allocated in market cap-weighted allocations.
Another way to invest is by trading the S&P 500 through CFDs. With this method, you will never actually own any of the shares or any part of the index. Instead, you will be speculating on the price movement of the index.
Should I invest in the S&P 500 index?
One of modern days, and indeed one of America’s all-time leading and most successful stock market investors, Mr. Warren Buffet is an advocate and has said “I want my own wife’s money invested in such a fund after I’m gone”.
Of course, he sees it as supporting the US market and US businesses. But it has to be remembered that a bet on US business has been a very good one for a long time now.
These investments need to be looked at in the longer term, 10 – 20 year investments are not uncommon. Remember the market can be volatile and shorter-term investments can be more vulnerable to losses. Making gains is the game here, so it’s not a place to risk money you can’t afford to lose.
Where can I invest in the S&P 500 index?
The best products and the clearest direction are via the well-established brokers. Those with the expertise in not just the US market, but those who are globally sound in knowledge and proficiency in the market place. They will have the portfolios that suit your needs and your best interests.
But also follow the advice of the leading and most successful investors and follow the five disciplines.
- Get educated, read everything you can. Go to bed a little smarter each night, than the day before.
- Follow what’s going on, stay informed of the latest global news, company news and economic news.
- Save first, spend only when you have to. Invest once you have your savings sorted.
- Don’t be frugal with yourself, be comfortable in your life now.
- Create a back-up fund for that rainy day, as it inevitably will come.
One day soon as you follow these disciplines you will find yourself able to use your money to make you money. What better way to look after yourself and your dependents?
Final Thoughts
The S&P 500 index is a leading indicator of the US market economy, quoting the 500 top performing stocks. Direct investment in business entities that are included can be made via purchasing shares in each individual business. Or indeed if you have the status of accredited investor you could then make a private placement.
However, direct investment on the S&P 500 index itself isn’t available for public investment but is available via S&P 500 index funds. These shadow and mimic the performance of the 500 members stock and your fund will allocate your investment proportionally in accordance with the stock value of the 500 business entities.
This matches the free-float market capitalization-weighted index. Designed this way to maximize potential returns and minimize potential losses.
When making these types of investments, have a longer-term view of your investment, there’s no quick fix here. Finally, remember to seek advice on your particular needs form a reputable and globally established broker.
Kate Leaman is the Chief Analyst and author at InvestorGreg. She won the Sky News Fiona McDiarmad award and subsequently became a journalist for Sky News. Read more
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