Introduction to the S & P 500 Index

Standard & Poor's is a financial services company known for its iconic stock market index, the S & P 500 (ticker symbol: SPX), created in 1957.。The index's formula puts the stock prices of 500 companies in different sectors into one number to quickly judge "how the U.S. stock market is doing."。It weights the market capitalization of each company, and the most valuable and largest companies have the greatest impact on the index, which is more reflective of the U.S. stock market.。

What are the members of the S & P 500 Index?？

In general, the top 500 U.S. public companies by market capitalization are included in the S & P 500。

As of January 2023, companies with a size criterion of $13.1 million or more in market capitalization were on the list.。The companies must be based in the United States, have publicly traded shares available for everyone to buy and sell, and have been profitable in the past year.。Even if valuations rank among the top 500 U.S. listed companies, unprofitable, highly valued companies do not qualify for the S & P 500。

Together, these 500 members account for about 80 percent of all publicly traded stocks in the U.S. The final decision on membership rests with index manager S & P Dow Jones。

How the S & P 500 is calculated？

The S & P 500 is weighted by market capitalization (the total value of all a company's shares - the share price multiplied by the number of shares outstanding)。

The numerator of the formula for the S & P 500 is the sum of all market capitalizations (values) of the 500 member companies; the denominator is an undisclosed number that S & P does not disclose to the public。But importantly, the share prices of 500 companies drive the S & P 500 up or down, and the companies with the highest market capitalization (also known as the most valuable companies) have the greatest impact on the index。

How to Calculate a Company's Weight in the S & P 500

Apple, Microsoft and Amazon - the first three companies to reach $1 trillion in market capitalization - are heavily weighted in the S & P 500, so their stock movements have a greater impact than lower-value companies。

To calculate a company's weighting in the S & P 500, divide the company's market capitalization by the total market capitalization of the S & P 500。For example, a company with a market capitalization of $50 billion gives the S & P 500 a weight of 1% for a total market capitalization of $5 trillion。

What is the use of the S & P 500 Index?？

• Measuring "how well stocks are performing": Since the S & P 500 covers 80% of publicly traded U.S. stocks, it helps measure the overall performance of the U.S. stock market。
• Benchmarks against your portfolio: An investor may own a group of stocks, calling it a "portfolio" of stocks。To assess whether your portfolio is performing well, look at the original percentage return。But relative performance to the S & P 500 is a more subtle approach: comparing the performance of your portfolio to the S & P 500 is a good way to assess whether your portfolio is outperforming or lagging the market。Another option to build your own portfolio is to "track the S & P 500"。
• Tracked by funds: Many investors prefer to invest extensively in the U.S. stock market rather than choose their own stocks, and an easy way is to buy shares in mutual funds or ETFs。Many mutual funds are built with underlying stocks that mimic the composition of the S & P 500 so that, with a single purchase, an investor can own a portion of the S & P 500 and benefit or fall like the S & P 500。

S & P 500 vs. Dow Jones

Both the Dow Jones Industrial Average ("DJIA") and the S & P 500 are used as a measure of the overall performance of the stock market, but there are some key differences between the two:

Number of enterprises included:

• The Dow is unique, and while it brings prestige to the 30 components, it also undercuts the Dow's role as an overall measure of the stock market。The situation for the stocks of the largest 30 companies is not necessarily the same as for the market as a whole。
• The S & P 500 is more inclusive because it houses 500 companies and better reflects "how the U.S. stock market is doing."。

how to calculate the weight of the stock

• As of January 2023, the Dow Jones figure was about 34,000.。The number is calculated using the index method, based on 30 stocks and weighted according to the share price。As a result, companies with the highest dollar share prices are the most heavily weighted and therefore have the greatest impact on the index。
• The S & P 500, on the other hand, is market capitalization-weighted。Market capitalization is more meaningful because it takes into account both the stock price and the number of shares outstanding in the market。The weight of the Dow is only one of them, and the stock price itself is not the best measure of what is important in the stock market。

Remember: Companies with higher stock prices have the most impact on the Dow, while companies with the highest market capitalization have the most impact on the S & P 500。

• S & P 500 = weighted by market capitalization = share price and shares outstanding
  Dow Jones = weighted by share price only

Standard & Poor's 500 Index vs. Nasdaq Index

The S & P 500 is a broad-based index that includes most high-capitalization companies and is a good cross-section of the U.S. stock market; the Nasdaq is more heavily influenced by technology stocks。As a result, the S & P 500 can more accurately reflect the U.S. stock market, while the Nasdaq can more accurately reflect the technology sector。

Limitations of the S & P 500

Not an accurate measure of the U.S. economy

The S & P 500 is often used to reflect the performance of the U.S. stock market, and sometimes commentators interpret its performance as a reflection of the U.S. economy。While the index does affect the well-being of the American people, this is only one factor。

Since stock prices are driven primarily by a company's ability to generate profits, the S & P 500 tends to rise as company profits rise, but company profits are not necessarily related to workers' income or economic well-being。

However, because the stocks of companies in the S & P 500 are owned by millions of Americans, a rise in the index would indirectly increase the wealth of the American people, and vice versa.。

Does not include small or private companies

While the S & P 500 does cover 80% of all publicly traded U.S. stocks, it excludes small businesses, private companies, and even large and medium-sized companies that are not in the top 500.。Therefore, it is important not to interpret the performance of the index as including companies or industries that are not in it.。

Note: You may not invest directly in market indices, which do not include any fees or expenses.。