The S&P 500 Index is a market capitalization-weighted index for 500 leading US-based publicly traded companies. The index does not have any other criteria for this index. This exchange provided the best measurement for the performance of American equities.
Stocks within S&P 500 represent the overall composition of the US economy. Due to this factor, the US market participants always pay attention to this index.
Table of Content
- Prerequisites for inclusion
- Calculation in the index
- S&P 500 as benchmark
- Should you invest in the index?
Prerequisities for Inclusion
There are certain requirements to qualify for the S&P index. A company must have:
- A minimum unadjusted market cap of $13.1 billion and a float-adjusted market cap of $6.55 billion.
- The value of its market capitalization trades annually.
- At least a quarter-million of its shares trade in each of the previous six months.
- A public float of minimum 10% of its shares outstanding.
- Released its IPO at least one year earlier.
- Minimum monthly trading volume should be 2,50,000 shares in every six months leading up to the evaluation date.
- Consecutive positive earnings in previous four quarters including the recent quarter.
Calculation in the Index
The S&P 500 is more complex in comparison with other indexes. It does not add the constituent’s stock prices but it adds the float-adjusted market capitalization companies. Since 2004, the S&P 500 index has used the float adjustment method. In this method, the index considers shares that are available to investors and excludes government or company-owned shares.
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This index is continuously recalculated based on shares trading. Whenever there is a stock split, spinoffs affecting the index value or special dividends, the divisor is adjusted. This divisor ensures that non-economic factors do not affect the index.
You will calculate the index in the following manner:
Why Do Companies Consider S&P 500 as Benchmark?
The market capitalization of the S&P index is around 70-80% of the total US stock market capitalization. Since S&P 500 represents such a large share of the market, investors use it as the benchmark for comparing the performance of their own portfolios.
Let us understand this with an example. If the S&P increases in value by 15% over a period of 6 months, and an investor’s portfolio increases by 22%. You can say that the investor’s stock picks beat the market by 7%.
Benefits of the Index
It is the default vehicle for those passive investors who want exposure to the U.S. economy through index funds. S&P 500 index has performed well in comparison with asset classes, such as commodities and bonds. The price appreciation of this index has accurately tracked the growth of the U.S. economy. It has also reflected price swings accurately in the S&P 500 during difficult economic times.
Difference Between S&P and Dow Jones
S&P 500 includes more companies and sectors than Dow Jones. The other difference between the two indexes depends on the method of weight assignment to individual companies in the index. S&P 500 weighs the constituent based on market capitalization whereas other markets like DIJA uses constituent stock’s price.
Should You Invest in The S&P 500 Index?
Over the years, the S & P 500 has delivered total gains of 9-10% annually. You can invest in a passive S&P 500 fund for almost no cost. It is important to do thorough research on stocks and maintain a portfolio before you start investing.
You can certainly achieve a positive ROI relative to the S&P 500. It is important for beginners to give time and study in this market. Once you start investing in this market, you will gain more exposure to the profitability of the US. businesses.
Can you buy S&P 500 stocks?
S&P 500 is not a stock. You can still buy stocks in companies that make up the S & P index. You can purchase a single investment in a fund of the S & P index. This will distribute the amount across every company in the index.
Explain ETF vs. Index funds.
Just like stocks, ETFs can be traded throughout the day. On the other hand, you can buy and sell index funds for a fixed price at the end of the day.