Standard and Poor 500 is a market index that measures the performance of the 500 largest, publicly-traded, companies in the United States. Listed companies in the index account for about 80% of the total U.S stock market capitalization. For that reason, the S&P 500 is a commonly followed market index as it provides the best representation of the U.S stock market.
The diversified nature of the companies listed in the index provides a good feel for the broader stock market. Information Technology companies account for the biggest share of the index ratings followed by financials, healthcare, industrials, and energy companies.
The top ten listed companies in the S&P 500 are Microsoft, Apple Amazon, Facebook , Berkshire Hathaway JPMorgan Chase & Co, Alphabet Johnson & Johnson and Procter & Gamble Company.
For accompany to be added in the S&P 500 index it must:
- Be a U.S company
- Have a market capitalization of not less than $5.3 billion
- Have a public float of at least 50% of outstanding shares
- Have positive reported earnings over the four most recent quarters
- Have an actively traded stock with a reasonable share prices
S&P 500 Weighting
S&P is a capitalization-weighted market index. What this means is that companies with the biggest market capitalization have a big impact on the index overall rating. Likewise, the portion of the index represented by each company is directly proportional to its market capitalization.
To determine the weighting of each company in the index, the total market cap of the index is calculated by adding the market caps of all individual companies. Conversely, the weighting of each company us computed by dividing each market cap with the total market cap of the index.
Market cap, in this case, is the value of all the shares that a company has issued to the public. It is calculated by multiplying the number of shares issued and the prevailing stock price.
For that reason, 10 of the largest publicly-traded companies in the U.S account for about 20% of the index overall performance.
S&P 500 Usefulness
The S&P 500 Is a closely followed index as it acts as an effective representation of the overall U.S economy. The listing of the top 500 companies in the U.S. means it has a good feel of all the sectors driving the U.S economy. In addition to stocks of big companies, the index also lists real estate investment trusts as well as business development companies.
The S&P differs from other indexes such as the Dow Jones Industrial Average because it has more large-cap stocks. It’s market capitalization also accounts for more than a quarter of the overall U.S stock market.