The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. The index actually has 503 components because three of them have two share classes listed. It is not an exact list of the top 500 U.S. companies by market cap because there are other criteria that the index includes. Still, the S&P 500 index is regarded as one of the best gauges of prominent American equities’ performance, and by extension, that of the stock market overall.
Key Takeaways
- The S&P 500 Index features 500 leading U.S. publicly traded companies, with a primary emphasis on market capitalization.
- The S&P 500 Index was launched in 1957 by the credit rating agency Standard and Poor’s.
- The S&P is a float-weighted index, meaning the market capitalizations of the companies in the index are adjusted by the number of shares available for public trading.
- Because of its depth and diversity, the S&P 500 is widely considered one of the best gauges of large U.S. stocks, and even the entire equities market.
- You can’t directly invest in the S&P 500 because it’s an index, but you can invest in one of the many funds that use it as a benchmark, tracking its composition and performance.
Unraveling the S&P 500 Weighting Formula
The S&P 500 uses a market-cap weighting method, giving a higher percentage allocation to companies with the largest market capitalizations.
Company Weighting in S&P 500 = (Company market cap / Total of all market caps)
To determine the weighting, start with calculating the total market cap for the index by summing up the market caps of all companies within the index. A company’s market cap is found by multiplying its current stock price by its outstanding shares.
The weighting of each company in the index is calculated by dividing the company’s market cap by the total market cap of the index.
Additional S&P Indices
The S&P 500 is a part of the S&P Global 1200 family of indices. Other noted indices include the S&P MidCap 400, representing mid-cap companies, and the S&P SmallCap 600, representing small-cap companies. Combined, the S&P 500, S&P MidCap 400, and S&P SmallCap 600 cover 90% of U.S. capitalization in an index known as the S&P Composite 1500.
t## Creating the S&P 500 The S&P 500 only considers the free-floating shares—the shares available to the public for trading. Adjustments are made for new share issues or company mergers. The total adjusted market caps of each company are then divided by a proprietary divisor to calculate the index value. Note that the S&P does not include cash dividend gains in its calculations.
Knowing the weighting of each company helps investors understand the influence each stock has on the index. For instance, a company with a 10% weighting will impact the index more than one with a 2% weighting.
Comparing S&P 500 Competitors
S&P 500 vs. Dow Jones Industrial Average (DJIA)
The Dow Jones Industrial Average (DJIA), another prominent U.S. stock market benchmark, differs in composition and weighting. While the S&P 500 uses market-cap weighting, DJIA uses price-weighting, which can lead to different influences on the respective indices.
S&P 500 vs. Nasdaq
Nasdaq is a leader in electronic trading. Some of the noted Nasdaq indices include:
- Nasdaq 100 Index: Top 100 large-cap companies.
- Nasdaq Composite Index: Covers more than 2,500 stocks.
- Nasdaq Global Equity Index (NQGI): Includes international stocks.
- PHLX Semiconductor Sector Index (SOX): Focuses on the semiconductor industry.
- OMX Stockholm 30 Index (OMXS30): Includes 30 stocks traded on the Stockholm Stock Exchange.
S&P 500 vs. Russell Indexes
A vital difference between the S&P and Russell indices is the selection method—S&P components are chosen by a committee. In contrast, the Russell indexes are formula-driven. Additionally, the Russell indexes may include the same company in both growth and value style indexes, unlike the S&P benchmarks.
S&P 500 vs. Vanguard 500 Fund
The Vanguard 500 Index Fund mimics the composition and performance of the S&P 500. Investors seeking direct exposure to the S&P 500 typically opt for such funds.
Constraints of the S&P 500 Index
Challenges arise when stocks within the index become overvalued. High weighting for overvalued stocks can inflate the overall index value. To counter this, equal-weighted indexes have gained traction, offering equal weight to every company’s stock price movements.
Example of Market Cap Weighting
To illustrate, here’s a calculation for Apple’s weighting in the S&P 500:
- Apple (AAPL) had 15.7 billion shares outstanding as of July 1, 2023, with a stock price of $173.93 as of Sept. 21, 2023, resulting in a market cap of $2.7 trillion.
- The S&P 500 total market cap was approximately $39.7 trillion as of Aug. 31, 2023.
- Apple’s weighting in the index: $2.7 trillion / $39.7 trillion ≈ 6.8%.
The Origins of Standard and Poor’s
The first S&P Index was introduced in 1923, a collaborative effort by the Standard Statistical Bureau and Poor’s Publishing, covering 233 companies. The entities merged in 1941, forming Standard and Poor’s.
Qualifying for S&P 500 Inclusion
A company must be publicly traded, U.S.-based, and meet criteria for liquidity and market capitalization, among others. A minimum public float of 10% of shares and positive earnings over the trailing four quarters are also required.
Investing in the S&P 500
Investing in the S&P 500 is facilitated through purchasing shares in index funds that mirror the index. These index funds offer a practical approach to achieve returns reflective of the S&P 500’s performance.
Final Thoughts
The S&P 500 Index is among the most widely recognized indicators for the U.S. equity market, showcasing the top 500 thriving enterprises. Ever since its inception, it has served as a crucial barometer for stock market trends and the overall economic landscape. Achieving exposure to these premier companies is streamlined through various index funds designed to track this iconic index.
Related Terms: Dow Jones Industrial Average, Nasdaq, Market-cap weighted, Vanguard 500 Fund, Russell Indexes.
References
- S&P Dow Jones Indices. “S&P 500: Overview”, Download S&P 500 (USD) Factsheet, Page 1.
- S&P Dow Jones Indices. “Index Mathematics Methodology”, Page 6.
- S&P Dow Jones Indices. “S&P Global 1200: Overview”.
- S&P Dow Jones Indices. “S&P Composite 1500: Overview”.
- S&P Dow Jones Indices. “S&P Float Adjustment Methodology”, Page 6.
- S&P Dow Jones Indices. “Blackstone and Airbnb Set to Join S&P 500; Others to Join S&P 100, S&P MidCap 400 and S&P SmallCap 600”.
- S&P Dow Jones Indices. “Icons: The S&P 500 and The Dow”.
- Nasdaq. “Nasdaq Equity Indexes”.
- S&P Dow Jones Indices. “S&P U.S. Indices Methodology”, Page 22.
- FTSE Russell. “Russell U.S. Equity Indexes”, Pages 11-13.
- S&P Dow Jones Indices. “S&P 500 Growth”.
- FTSE Russell. “Russell Growth and Value Indexes: The Enduring Utility of Style”, Pages 5-7.
- Vanguard. “Vanguard 500 Index Fund Admiral Shares (VFIAX)”.
- Financial Industry Regulatory Authority. “Market Cap Explained”.
- FTSE Russell. “Equal Weighting the Russell 1000 Index”, Pages 1, 3.
- U.S. Securities and Exchange Commission. “Apple, Inc. Form 10-Q for the Period Ending July 1, 2023”.
- Apple Investor Relations. “Stock Price”.
- Companiesmarketcap. “Market Capitalization of Apple (AAPL)”.
- S&P Dow Jones Indices. “S&P 500: Overview”, Download S&P 500 (USD) Factsheet, Page 5.
- S&P Global. “Our History”, Select 1941-1965 Embracing Partnership: Explore More.
