The S&P 500 and How It Works

The S&P 500 is a stock market index that tracks the stocks of 500 large-cap U.S. companies. It represents the stock market's performance by reporting the risks and returns of the biggest companies. Investors use it as the benchmark of the overall market, to which all other investments are compared.

S&P stands for Standard and Poor, the names of the two founding financial companies. It was officially introduced on March 4, 1957 by Standard & Poor. McGraw-Hill acquired it in 1966. The S&P Dow Jones Indices owns it as of 2022 and that's a joint venture between S&P Global (formerly) McGraw Hill Financial, CME Group, and News Corp, the owner of Dow Jones.

The S&P 500 had an average 10-year annual return of 13.9% as of Jan. 7, 2022.

How the S&P 500 Works

The S&P 500 tracks the market capitalization of the companies in its index. Market cap is the total value of all shares of stock that a company has issued. It's calculated by multiplying the number of shares issued by the stock price. A company that has a market cap of $100 billion receives 10 times the representation as a company whose market cap is $10 billion. The total market cap of the S&P 500 was $34 trillion as of January 2022. 

A committee selects each of the index's 500 corporations based on their liquidity, size, and industry. It rebalances the index quarterly, in March, June, September, and December.

A company must be in the United States and have an unadjusted market cap of at least $13.1 billion to qualify for the index. At least 50% of the corporation's stock must be available to the public. Its stock price must be at least $1 per share. It must file a 10-K annual report. At least 50% of its fixed assets and revenues must be in the United States. Finally, it must have at least four consecutive quarters of positive earnings.

The stock can't be listed on pink sheets or traded over the counter. It must be listed on the New York Stock Exchange, Investors Exchange, Nasdaq, or BATS Global Markets.

As of January 7, 2022, the ten largest companies, with a weighted market cap, in the S&P 500 were:

1. Apple Inc. (AAPL)
2. Microsoft Corp. (MSFT)
   
3. Amazon.com Inc. (AMZN)
4. Alphabet Inc. A (GOOGL)
5. Tesla, Inc (TSLA)
6. Alphabet Inc. C (GOOG)
7. Meta Platforms, Inc. Class A (FB)
   
8. Nvidia Corp. (NVDA)
9. Berkshire Hathaway B (BRK.B)
   
10. Unitedhealth Group Inc. (UNH)

As of January 7, 2022, the S&P 500 sector breakdown included:

• Information Technology: 29.2%
• Health Care: 13.3%
• Consumer Discretionary: 12.5%
• Financials: 10.7%
• Communication Services: 10.2%
• Industrials: 7.8%
• Consumer Staples: 5.9%
• Real Estate: 2.8%
• Energy: 2.7%
• Materials: 2.6%
• Utilities: 2.5%

S&P 500 vs. Other Stock Market Indexes

The S&P 500 has more large-cap stocks than the Dow Jones Industrial Average. The Dow tracks the share price of 30 companies that best represent their industries. Its market capitalization accounts for almost one quarter of the U.S. stock market. The Dow is the most quoted market indicator in the world.

The S&P 500 has fewer technology-related stocks than the Nasdaq. As of June 2021, 55% of Nasdaq allocations were in information technology compared to 28% for the S&P 500.

All these stock indexes tend to move together despite their differences. You can still understand how well the stock market is generally doing if you focus on only one. You don't have to follow all three.

Milestones of the S&P 500

The following table shows various milestone events of the S&P 500, including both highs and lows, and other memorable moments.

How to Use the S&P 500 to Make Money

You can't invest in the S&P, but you can mimic its performance with an index fund. You could also buy shares of stocks that are in the S&P 500.

You can use the S&P 500 as a leading economic indicator of how well the U.S. economy is doing. Investors tend to buy stocks when they're confident in the economy.

Since the S&P 500 only measures U.S. stocks, monitoring foreign markets may help provide a global view, such as emerging markets like China and India. You could also consider holding a small percentage of your investments in commodities, such as gold, which might hold their value longer when stock prices decline.

Besides following the S&P 500, following the bond market might help with your investment goals. Standard & Poor's also gives bonds credit ratings. Although bond prices tend to move in the opposite direction of stock prices, that's not always the case. Both bond and stock prices can be volatile at times.

There are many different types of bonds. They include Treasury bonds, corporate bonds, and municipal bonds. Bonds provide some of the liquidity that keeps the U.S. economy lubricated. Bonds can also impact mortgage interest rates.

Frequently Asked Questions (FAQs)