The S&P 500 is a stock market index containing the stocks of 500 American Large-Cap corporations. The index is owned and maintained by Standard & Poor's, a division of McGraw-Hill. All of the stocks in the index trade on the two largest US stock markets, the New York Stock Exchange and Nasdaq. The Dow Jones Industrial Average and the S&P 500 are the most widely watched indexes of large-cap US stocks. The S&P 500 is often quoted using the symbol SPX or INX, and may be prefixed with a caret (^) or with a dollar sign ($).
Many index funds and exchange-traded funds track the performance of the S&P 500 by holding the same stocks as the index, in the same proportions, and thus attempt to match its performance (before fees and expenses). Partly because of this, a company which has its stock added to the list may see a boost in its stock price as the managers of the mutual funds must purchase that company's stock in order to match the funds' composition to that of the S&P 500 index. Additionally, the S&P 500 index is often used as a baseline level of performance against which mutual funds and other asset managers' performance is measured.
The S&P 500 index is not made up of the 500 largest corporations in the U.S., since other factors such as liquidity of the stock and industry grouping are also considered in selecting members for the index. For example, Berkshire Hathaway is not included in the S&P 500 index since it is a holding company and does not meet liquidity guidelines due to its high share price.
The criteria for being added to the index are as follows:
It should be noted that these criteria are applicable to companies that are being added to the S&P 500. Since the index committee attempts to minimize unnecessary turnover in index membership, existing companies do not have to diligently maintain these conditions to remain in the index. However, companies that substantially violate one or more of these criteria are removed from the index and replaced by a new company. As a result, on a year-to-year basis, the composition of the index only changes slightly.
As of January 21 2009, the largest constituents of the index were:
|Company||Adjusted Market Cap ($ billions)||Index Weight|
|Procter & Gamble||185.7||2.35%|
|Johnson and Johnson||166.0||2.11%|
|JPMorgan Chase & Co.||117.7||1.50%|
The Standard & Poor's 500 Index is calculated using a base-weighted aggregate methodology; that means the level of the Index reflects the total market capitalization of all 500 component stocks relative to a particular base period. The S&P 500's base period is 1941-43. The actual total market value of the stocks in the Index during the base period has been set equal to an indexed value of 10. This is often indicated by the notation 1941-43=10.
In practice, the daily calculation of the Standard & Poor's 500 Index is computed by dividing the total market value of the 500 companies in the Index by a number called the Index Divisor. By itself, the Divisor is an arbitrary number. However, in the context of the calculation of the S&P 500 Index, it is the only link to the original base period value of the Index. The Divisor keeps the Index comparable over time and is the manipulation point for all Index Maintenance adjustments.
In 2005, the Index was changed to be "float" weighted, i.e. the index weighting is determined by the amount of shares available for public trading. It works exactly the same way as the market-cap weighting, only that instead of making each component proportional to their respective market capitalization, they are made to be proportional to their public float. When Google was included in the index in March 2006, only its Class A shares, which are publicly traded, were used to determine Google's weight in the index. Only a minority of companies in the index have this sort of public float lower than their total capitalization; for most companies in the index S&P considers all shares to be part of the public float and thus the capitalization used in the index calculation equals the market capitalization for those companies.
Being a market-value weighted index, changes in price for companies with higher market capitalization has a proportionally larger impact on the index. For example: In June 2008, Exxon Mobil's weight in the S&P 500 Index was roughly 4.2%. If Exxon Mobil's market capitalization increased by 10%, it would cause the S&P 500 to rise by
10%*4.2% = 0.42%
On the other hand, Apple's weight in the index, in June 2008, was 1.3%. Therefore if Apple's market capitalization increased by 10%, it would cause the index to rise by
10%*1.3% = 0.13%
In order to keep the S&P 500 Index comparable across time, the index needs to take into account corporate actions such as stock splits, share issuance, dividends and restructuring events (such as merger or spinoffs). Additionally, in order to keep the Index reflective of U.S. stocks, the constituents need to be changed from time to time.
To prevent the value of the Index from changing due to corporate actions, all corporate actions which affect the market value of the Index require a Divisor adjustment. Also, when a company is dropped and replaced by another with a different market capitalization, the divisor needs to be adjusted so that the value of the S&P 500 Index remains constant. All Divisor adjustments are made after the close of trading and after the calculation of the closing value of the S&P 500 Index.
|Type of Action||Divisor Adjustment|
|Stock Split (e.g. 2x1)||No|
|Special Cash Dividend||Yes|
Retail investors can place bets on the S&P 500 through several ways:
Moreover, the top 45 companies in the index constitute 50% of the index. Thus an average investor could engineer the index to a great extent by holding these companies in the right proportion.