What is the S&P 500?
The S&P 500 stands for “Standard and Poor’s 500”.It is a group of five hundred widely held common stocks whose average performance is a measurement of changes in stock price, thus creating an “index”.This index is a market-value weighted index, meaning that each stock’s weight in the index is proportionate to its market value.In 2005, the S&P 500 transitioned to a float weighted index.Under this system, the weight or percentage contributed to the index is determined by taking the equity’s price and multiplying it by the number of shares readily available in the market.These are known as free-floating shares.It now provides a more accurate reflection of market movements by excluding locked-in shares such as those held by promoters and governments.This change was made so that companies that have a large percentage of their shares controlled by insiders would be represented more accurately.
Standard and Poor’s is responsible for selecting stocks and publishing the index. Companies included in the index are selected by a team of analysts and economists known as the S&P Index Committee.The companies’ stocks are chosen for their market size, liquidity and industry grouping, among other factors.
The S&P 500 is one of the most commonly used benchmarks for the overall U.S. stock market.At one time it was considered the Dow Jones Industrial Average to be the most well known index for U.S. stocks.However, the Dow Jones contains only 30 companies so many people now believe the S&P 500 is a better representation of the U.S. market.In fact, many consider it to be the best definition of the market.Other popular Standard and Poor’s indexes include the S&P 600, an index of small-cap companies with a market capitalization between $300 million and $2 billion, and the S&P 400, an index of mid-cap companies with market capitalizations of $2 billion to $10 billion.The S&P 500 is an index of large-cap companies with market capitalizations between $10 billion and $200 billion.
What does the S&P 500 matter to me as an investor?
A number of financial products based on the S&P 500 are available to investors. These include index funds and exchange-traded funds or ETFs.
An index fund is a portfolio of investments that is weighted the same as a stock-exchange index.Investing in an index fund is a form of passive investing. There are two big advantages to investing in index funds, the primary advantage being that management expenses are significantly lower than trading regular stocks.Another advantage is that a majority of mutual funds fail to beat broad indexes such as the S&P 500.
Exchange-traded funds are securities that track an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange, thus experiencing price changes throughout the day as it is bought and sold. Because it trades like a stock whose price fluctuates daily, an ETF does not have its net asset value (NAV) calculated every day like a mutual fund does.The ETF that tracks the S&P 500 index is called the SPDR (Spider) and trades under the symbol SPY.In a Reuters article that appeared on MSNBC.com, a Standard and Poor’s official stated that more than $1.1 trillion is invested in index funds that track the S&P 500
By owning an ETF, you get the diversification of an index fund as well as the ability to sell short, buy on margin and purchase as little as one share. Another advantage is that the expense ratios for most ETFs are lower than those of the average mutual fund. When buying and selling ETFs, you have to pay the same commission to your broker that you’d pay on any regular order..