The Standard & Poor’s 500, often abbreviated as the S&P 500, or just “the S&P“,is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The Standard & Poor’s 500 index components and their weightings are determined by S&P Dow Jones Indices.
It is one of the most commonly followed equity indices, and many consider it one of the best representations of the U.S. stock market, and a bellwether for the U.S. economy. The National Bureau of Economic Research has classified common stocks as a leading indicator of business cycles.
The S&P 500 was developed and continued to be maintained by S&P Dow Jones Indices, a joint venture majority-owned by S&P Global. S&P Dow Jones Indices publishes many stock market indices such as the Dow Jones Industrial Average, S&P MidCap 400, the S&P SmallCap 600, and the S&P Composite 1500. It is a free-float capitalization-weighted index, and has many ticker symbols, such as: ^GSPC, INX, and $SPX.
The original predecessor to the Standards & Poor’s 500 was launched in 1957, though it looked nothing like the S&P 500 of today. The folks who run the stock market index have slowly, yet substantially, changed it over time. In fact, there is considerable academic evidence if the changes put in place over the past 13 years had been in effect from the beginning, the Standard & Poor’s 500 would have compounded at much lower rates; a warning you won’t see on any index funds at present.
The S&P 500 has fewer large cap stocks than the Dow Jones Industrial Average. The Dow tracks the share price of 30 companies which best represent their industries. Its market capitalization accounts for nearly one-quarter of the total U.S. stock market. The Dow is the most quoted market indicator in the world.
The Standard & Poor’s 500 also has less technology related stocks than the NASDAQ. All of these stock indices move pretty closely together, so if you focus on one, you will understand how well the stock market is doing.
The Standard & Poor’s 500 tracks the 500 largest (measured by market value) publicly traded companies. The publishing firm Standard & Poor’s created this index.
Standard & Poor’s 500 is a reliable indicator of the market’s overall status, the S&P 500 also has some limitations. Despite the fact that it tracks 500 companies, the top 50 companies encompass 50 percent of the index’s market value. This situation can be a drawback because those 50 companies have a greater influence on the Standard & Poor’s 500 index’s price movement than any other segment of companies.
In other words, 10 percent of the companies have an equal impact to 90 percent of the companies on the same index. Therefore, although the index better represents the market than the DJIA, the index may not offer an accurate representation of the general market.
S&P doesn’t set the 500 companies they track in stone. S&P can add or remove companies when market conditions change. They can remove a company if it isn’t doing well or goes bankrupt, and they can replace a company in the index with another company that is doing better.
The S&P 500, like any measurement of the stock market, is often used as an leading economic indicator of how well the U.S. economy is doing. If investors are confident in the economy, they will buy stocks. Some experts believe the stock market can often predict by about six months what the savviest investors think the economy will be doing.
Besides following the Standard & Poor’s 500, you should also follow the bond market. Generally, when stock prices go up, bond prices go down. There are many different types of bonds.
These include Treasury Bonds, corporate bonds, and municipal bonds. Bonds also provide some of the liquidity that keeps the U.S. economy lubricated. Their most important effect is on mortgage interest rates. To help you do this, Standard & Poor’s also rates bonds.
The S&P 500 only measures U.S. stocks. You should also keep an eye on foreign markets, especially emerging markets like China and India. It’s also good to keep 10% of your investments in commodities, like gold.