S&P 500 Index

The Standard and Poor’s index, more commonly known as the S&P 500, or simply the S&P, or SPX, is a stock market index that tracks the stock performance of 500 of the largest publicly traded companies in the United States, weighted by market capitalization.

The index is commonly used to give an indication of how the U.S. stock market is performing and provides a benchmark for financial experts. It offers investors a way to measure success and many investors, as well as professionals such as analysts, hedge fund managers, and financial bloggers aim to beat the S&P 500.

In total there are 505 companies in the S&P. The index includes stocks from 11 sectors – Communication Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Materials, Real Estate, Technology, Utilities.

Since the index is weighted by market capitalization, the largest companies have a significant influence on its performance. These companies include Alphabet (Google), Amazon, Apple, Facebook, Johnson & Johnson, and Microsoft. While many companies in the index are household names, some are less well known.

As stock prices and numbers of shares are constantly changing, the composition of the S&P occasionally changes.

The S&P is calculated using “a float-adjusted, market capitalization weighted methodology”. It does this by measuring the value of the stocks of the 500 largest, or more accurately 505, companies listed on the New York Stock Exchange, or Nasdaq Composite.

Float adjusted means that the SPX is continually recalculated according to the number and price of shares trading. If a company issues or removes shares, then the index is recalculated to reflect this.

Market capitalization is a way of measuring the total value of a public company. It is calculated by multiplying the price of a stock by its total number of outstanding shares.

The weighted methodology means that the companies in the index are not valued equally. Rather, companies with a larger market cap make a greater contribution. Hence, the 10 largest companies account for approximately 25% of the index’s entire market capitalization.

Exchange traded funds, (ETFs), and mutual funds are similar in concept. Both are diversified investments that pool investors’ money to buy a basket of securities within a single security. However, there are some important differences.

Most mutual funds are actively managed by a professional investor. ETFs track an index such as the S&P 500 and are usually passive investments. Saying that, some mutual funds follow an index and are passive, and actively managed ETFs do exist, although are rare.

ETFs and mutual funds are traded differently. While mutual funds can only be bought or sold after the market closes, ETFs can be traded throughout the day when markets are open. Mutual funds are more complex investments than ETFs, and this affects fees. The expense ratio which is made up of management, operational, and other fees, is usually higher for mutual funds, given their complexity and active management. Mutual funds often have a higher entry cost that ETFs.

If you are considering investing in an ETF or mutual fund, you should also check what the tax implications are, as they too can differ.