What Is the S&P 500 Stock Market Index?
The S&P 500 is a popular stock market index that comprises 500 publicly traded, U.S.-based companies with high market capitalization.
Because the S&P 500 focuses on companies with high market capitalization (and because companies with higher market capitalization hold more weight in the index), its performance is considered by many to be a good representation of the performance of the high-market-cap portion of the stock market as a whole. In fact, many investors look to the index as a gauge of the health of the stock market—and even the U.S. economy—at large.
The S&P 500 is one of many indexes compiled and maintained by Standard and Poor’s Global Ratings, the largest American credit rating agency.
How Is the S&P 500 Weighted?
The companies tracked by the S&P 500 are weighted by float-adjusted market cap, so the higher a company’s market capitalization, the more influence the company’s stock price has on the price of the index as a whole. For instance, a company with a float-adjusted market cap of 50 billion would have five times the representation of a company with a market cap of 10 billion.
Note: Market capitalization is the total market value of all of a company’s tradable shares. In other words, it is the product of a company’s current share price and its number of outstanding shares. Float-adjusted market cap only takes into account shares that are available to the public and excludes restricted shares held by company insiders and controlling investors.
What Companies Are Included in the S&P 500?
The S&P 500 includes too many companies to list here, but the top 10 by adjusted market capitalization (as of October 3rd, 2022) are as follows:
- Apple Inc.
- Microsoft Corporation
- Amazon.com Inc.
- Tesla Inc.
- Alphabet Inc. Class A
- Alphabet Inc. Class C
- Berkshire Hathaway Inc. Class B
- Unitedhealth Group Inc
- Johnson & Johnson
- Exxon Mobil Corp
How Does Standard and Poor’s Decide What Companies to Include In the S&P 500?
Simply having a high market cap isn’t necessarily enough to land a company in the S&P 500. There are a number of criteria that must be met in order to be considered for inclusion.
To be included in the index, a company must . . .
- be based in the U.S.
- have an unadjusted market cap of at least $13.1 billion.
- have a float-adjusted market cap of at least $6.55 billion.
- have an investable weight factor of at least 0.1 (in other words, at least 10 percent of a company’s shares must be available for public trading—not held by “insiders”).
- have adequate liquidity and a reasonable stock price.
- be a good representation of its sector or industry.
- be a common equity listed on an eligible U.S. exchange.
Over time, Standard and Poor’s adds and removes companies from the index based on how good of a fit they are given the above criteria. For this reason, some companies have been included on the index for many years, while others were added more recently. For example, JPMorgan Chase & Co. has been a part of the index since 1975, whereas Tesla Inc. wasn’t added until 2020.
How Well Does the S&P 500 Reflect the Stock Market at Large?
First, the DJIA only tracks 30 companies, while the S&P tracks 500. Second, the DJIA weighs company influence by stock price (which doesn’t reflect company size), while the S&P weighs companies by market cap (which does). Third, because the 500 companies tracked by the S&P are some of the largest in the U.S. by market cap, they actually represent around three-quarters of the American stock market at any given time.
That being said, other indexes that represent larger portions of the total market by market cap do exist. The Russel 3,000 and the Wilshire 5,000 are two popular indexes that include more of the market than the S&P 500.
Why Do Investors Use the S&P 500 as a Benchmark?
Because the S&P represents such a large portion of the market, many investors use the index as a representation of the market and a benchmark against which to compare the performance of their own portfolios.
For instance, if the S&P went up in value by 15 percent over the last 6 months, and an investor’s portfolio went up in value by 25, that investor might safely assume that their stock picks beat the market by around 10 percent.
Businesses with publicly traded stock can also use the index as a benchmark against which to compare performance, but using an industry-specific index would probably provide more insight, as growth expectations vary significantly between sectors.
Can You Invest In the S&P 500?
Since it is an index and not a fund, you cannot invest in the S&P 500 directly. There are, however, a number of publicly traded funds designed specifically to track the performance of the S&P 500.
For many investors, especially hands-off investors who want their accounts to outpace inflation and grow with the market but don’t want to actively pick their own stocks, investing in a fund that tracks a bellwether index (an index that is thought to be reflective of the market) can be a good way to passively grow their savings.
Some funds that track indexes are mutual funds, and others are ETFs (exchange-traded funds). Either of these asset classes may charge fees, and some funds charge more than others. Brokers may also charge fees for trading, although some do not. Those hoping to hold long-term need not worry as much about maintenance and trading fees, but more active traders should take these costs into consideration.
Generally, lower expense ratios (maintenance costs) and higher AUM (assets under management, or how much client money the fund manages), translate to better value for fund investors.
Popular Funds That Track the S&P 500
|Fund||Ticker||Expense Ratio||Assets Under Management||Minimum Investment||MF or ETF?|
Vanguard 500 Index
SPDR S&P 500
iShares Core S&P 500
Fidelity 500 Index Fund
Schwab S&P 500 Index Fund
State Street S&P 500 Index Fund Class N
What Other Popular Stock Indexes Are There?
The S&P 500 may be one of the most popular sources of information regarding the market’s health, but it’s far from the only stock index out there. Other popular and often-discussed indexes include the following.
The Dow Jones Industrial Average
The DJIA is the second-oldest stock index in the U.S. (after the Dow Jones Transportation Average) and one of the most frequently discussed by the media. The DJIA is weighted by share price (not market cap) and only tracks 30 companies at a time, so despite its age and popularity, it is not considered a particularly strong gauge of the market.
The Nasdaq Composite
The Nasdaq Composite is another large and popular U.S. stock market index. The index includes most of the stocks traded on the Nasdaq stock exchange (the second-largest U.S. exchange after the NYSE) and—like the S&P—is weighted by market cap. Because many of the companies included in the composite are in the information technology sector, the index dropped sharply in price when the dot-com bubble burst in the early 2000s.
The Russel 1,000
The Russel 1,000, like the Nasdaq and S&P indexes, is a market-cap-weighted index of companies listed on U.S. stock exchanges. A subset of the larger Russel 3,000, the index includes the 1,000 largest companies by market cap and represents over 90 percent of the market capitalization of all U.S.-listed stocks. Because of its size, many investors use it as a benchmark.
The Wilshire 5,000
The Wilshire 5,000, like the Nasdaq, S&P, and Russel indexes, is a market-cap-weighted index of companies listed on U.S. stock exchanges. The Wilshire, however, aims to track all American stocks listed on major exchanges like the NYSE, the Nasdaq, and the American Stock Exchange. Low-value stocks that trade on the over-the-counter (OTC) market are not typically included. Because of this index’s size and the fact that it encompasses nearly the entire American stock market in terms of capitalization, it is also used by many investors and institutions as a benchmark against which to compare performance.
Frequently Asked Questions (FAQ)
Below, find the answers to some of the most common questions investors ask about the S&P 500.
How Long Has the S&P 500 Been Around?
The S&P 500 as it currently exists has been around since Monday, March 4th, 1957. It grew out of a 90-stock index that was maintained by Standard Statistics Company, which merged with Poor’s Publishing in 1941.
What Does It Mean When Someone Says the S&P 500 Went Up or Down by X Points?
Points equal dollars. If the S&P 500 went up by 10 points yesterday, that means the weighted average market value of its component stocks went up by $10 yesterday. Because the index is weighted by market cap, changes in larger companies’ stock prices affect the price of the index more significantly than changes in smaller companies’ stock prices.