Its name crops up on a daily basis in relation to market performance and is considered a measure for overall market health, but what is the S&P 500?
It is hard to write about the state of the stock market without referencing the major indices and how they are performing. The Dow Jones Industrial Average (NYSEARCA: DIA), the Nasdaq Composite (NASDAQ: NDAQ), and lastly, the S&P 500 (NYSEARCA: VOO), are the go-to indicators of market performance.
Many investors understand that these indices are important, but may not be fully aware of what the S&P 500 actually means as an individual index. Most will not even know that S&P stands for ‘Standard & Poor’s’, named after the two financial companies that merged in 1941 to become the modern S&P.
Simply put: The S&P 500 is a stock market index that tracks the stocks of 500 large-cap U.S. companies, and despite the name, it contains 505 stocks because it includes two share classes of stock from 5 of its component companies.
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How is the value of the S&P 500 calculated?
The S&P 500 tracks the market cap of the companies it follows. This is different and more accurate than the Dow Jones, which is price-weighted. As such, companies with a large market cap have a bigger effect on the index — a $50 billion company will have 5 times the impact a $10 billion company would
It’s a good measure of the market because it’s a float-adjusted market cap, which means it only measures the shares available to the public and does not count those held by control groups, other companies, or government agencies.
What companies are in the S&P 500?
It is the largest collection of publicly traded stocks in the U.S. and encompasses roughly 80% of the entire U.S. stock market — nearly $10 trillion in assets.
Most of the names you would associate with being in the top 500 in America are in the S&P 500. It is easy enough to find the complete list, but for now, you can find the top 10 companies (as of April 2020) right here:
- Microsoft (NASDAQ: MSFT)
- Apple (NASDAQ: AAPL)
- Amazon (NASDAQ: AMZN)
- Facebook (NASDAQ: FB)
- Johnson & Johnson (NYSE: JNJ)
- Alphabet (NASDAQ: GOOG)
- Berkshire Hathaway (NYSE: BRK.B)
- Procter & Gamble (NYSE: PG)
- JP Morgan (NYSE: JPM)
- Visa (NYSE: V)
No surprises there really, and the fact that there are 490 more of these big-hitters shows just how prestigious the S&P 500 is. However, it is not totally balanced, with just 5 out of these 500 stocks making up close to a quarter of its total growth in 2019. The top 4 companies above, and Alphabet, in 6th place, made up just under 23% of the S&P’s 28.9% growth in 2019.
How do companies get into the S&P 500?
It is not a simple case of companies meeting criteria and automatically being included or booted from the list. Once a quarter, stocks are added or deleted as rules change, companies grow (or shrink), and merge. The ins, outs, and adjustments to companies’ weights in the index are subject to a committee which decides whether a company is added or removed.
The S&P’s committee is headed by Philip Murphy, who runs this blend of art and science, deciding on what warrants entry to his lucrative list.
There are still certain criteria that must be met however, which have been adjusted throughout the years. As of 2020, the following three basic criteria are required just to be considered for entry:
- Market capitalization must be greater than or equal to US$8.2 billion.
- Annual dollar value traded to float-adjusted market capitalization is greater than 1.0.
- Minimum monthly trading volume of 250,000 shares in each of the six months leading up to the evaluation date.
- The company must be publicly traded on either the New York Stock Exchange (NYSE: NEW) or Nasdaq.
The committee will also assess criteria such as: market capitalization, liquidity, domicile, public float, sector classification, financial viability, and length of time publicly traded and stock exchange. As well as this, the 30 companies included in the Dow are always a part of the S&P 500.
Can a company be removed from the S&P 500?
Yes, a company can most definitely be dropped from the S&P 500 index. In-fact, every time a new company is added, another must be removed, that’s just how it works. If a company is not performing very well, goes bankrupt, or is simply not big enough anymore to keep up, it can be dropped by the committee.
Some big names that have been dropped in the past include Dell (NYSE: DELL) and Sears.
Should I invest in the S&P 500?
The S&P 500 is a wonderful investment for anyone who wishes to get started, as it’s essentially the same as investing in the 500 best companies at once. It has grown on average, close to 10% annually since its inception in 1957, and probably includes some of the companies you would have invested in anyway.
However, there are ways to beat the S&P 500; we’ve been doing it for years. Just check out how our world-class selection of stocks has beat the market recently:
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Yes, you can invest in the S&P 500 through an ETF that tracks it, such as VOO or SPY.
The average return on the S&P 500 is around 9.8%.
The S&P 500 is made up of the 500 biggest companies listed in the U.S. including Apple, Microsoft, and more.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.