S&P 500 Explained

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S&P 500 Explained

S&p 500 Explained
Summary
  • The S&P 500 is a significant index in the United States. Most of the stocks in the S&P 500 reflect the relative strengths and weaknesses of the U.S. economy.

  • To be part of the S&P 500, your company has to be based in the United States, and must also meet specific criteria. 

  • Investing in S&P directly is impossible, but you can buy shares in the S&P and invest in ETFs or Index funds.

  • These funds sometimes offer slice-stock programs, so if you can’t afford some major stocks, you can buy fractional stocks. 

Table of Contents

Introduction

S&P 500 stands for Standard & Poor’s 500. S&P 500 is a prominent stock & equity index that comprises over 500 of the world’s largest companies based in the US. These companies are traded on various stock market exchanges like Dow Jones, NASDAQ, NYSE, etc.

The S&P dates back to the 19th century when an Economist called Henry Varnum Poor established a publishing company focused on publishing a weekly guide for investors who wanted to invest in the railroad industry.

This publishing company ran for many years before another publishing company called Standard Statistics Company was founded. 

This publishing company focused on rating mortgage bonds for investors in its publication and created the first stock market index, which included stocks of over 200 companies in the US.

Both publishing companies merged in 1941 and formed the Standard & Poor’s 500 stock index tracker.

Today, the S&P is popularly known by investors, and it helps in tracking down the stock prices or the share prices of the largest companies in the US. You can say that the S&P helps us know the performance of the stock market and the economy overall.

What is the S&P 500?

The S&P 500 is a stock market index tracker that helps investors know which companies are worth investing in by keeping track of the share prices of the largest companies in the United States, whose market capitalisation is over $11 billion.

The S&P is divided into 11 sectors:

  1. Health
  2. Technology
  3. Health Care
  4. Financials
  5. Real Estate
  6. Consumer Discretionary
  7. Consumer Staples
  8. Energy
  9. Industrials
  10. Materials
  11. Communication Services, and Utilities.

Daily, with the help of the S&P 500, investors know which US stocks are losing or gaining value. Currently, The S&P 500 is managed by S&P Dow Jones Indices, a joint venture that S&P Global majorly owns. 

Today, the S&P monitors up to 503 of the most prominent US companies, and all companies have a combined value of $40 trillion. According to S&P, its most performing and largest sectors include healthcare, finance, and information technology.

How Does the S&P 500 Work?

The S&P 500 works in a simple way. First of all, companies are specifically selected and chosen by a committee.

The committee chooses the companies that should be part of the index by checking the market capitalisation, liquidity, and industry of publicly traded companies.

Every company’s value in the S&P 500 is calculated by multiplying the total value of its outstanding shares by its current stock price.

For instance, a company with 20 million publicly traded shares and a stock price of $15 has a value of $300 million.

For a company to be part of the S&P 500, they ought to specific criteria, and they are:

    • The company must be based in the U.S. with a significant amount of your fixed assets.
    • The company shares should be easy to trade and must have traded over 250,000 daily shares six months before its inclusion in the S&P.
    • Up to 50% of the company’s shares should be available to trade on the exchange.
    • The company stock should be included on a major exchange such as the New York Stock Exchange or Nasdaq Stock Exchange.
    • The company should have an unadjustable market capitalisation of at least $10 billion.

You should know that over the years, some stocks have been deleted and added to the index. This is due to changes in market capitalisation, mergers, bankruptcy, and acquisition.

Recent studies by McKinsey reveal that the lifespan of a company in the S&P 500 is 17 years. This is a massive drop from its average lifespan of 60 years in 1958.

As an investor, this means that some companies listed on the S&P 500 index will be removed and replaced with another company that may outperform the ones removed (or not).

  • The removal of companies in the S&P is carried out by monitoring the sectors regularly as it shows the economic changes.

  • It is important to note that it is not measured in dollars but in points.

  • When the index’s component stocks move up or down daily, the S&P index goes up and down.

How to Start Investing in the S&P 500?

The perks of investing in the S&P 500 as an investor means that you can invest in the collection of the most excellent performing stocks in the world. 

And investors who invest in the S&P 500 have a 10% annual return on their investment. When compounded over time, this can be worth so much. 

It has been highly advised (by Warren Buffet, the most prominent investor) to invest in the S&P 500, especially if you are a new-time investor in the stock market.

You should know that the way to invest in the S&P 500 is by either purchasing its stocks or by investing in index funds or an ETF (exchange-traded fund). 

Here is a brief explanation below: 

Exchange-Traded Funds

The ETFs aim to emulate the performance of a market index such as the S&P 500. 

Although ETFs and index funds are almost similar, ETFs can be traded anytime on the stock exchange trading day. On the other hand, index funds can only be traded once at the end of a trading day.

Exchange-traded funds cost less because of their lower operating expenses. 

However, before choosing an S&P 500 Exchange-traded fund, consider the following:

    • Make sure the payout rate for the S&P ETF you choose is comparable to the top S&P 500 ETFs, if not more.

    • Don’t choose an ETF with a higher cost; instead, choose an ETF with the lowest expense ratio. An ETF with a higher price doesn’t assure increased profits.

    • Choose an ETF that has more economic cycles than the others. With this, you can be assured of its success over time.

    Buying S&P 500 Stocks

    To buy S&P 500 stocks, you’ll have to open an online stock-trading account. 

    Before gaining full access to the account, you’ll be asked to state your investment risk tolerance and goals. 

    Once this is done, you can find your account and buy stocks.

    S&P 500 stocks are known to be pricey, but if you’re on a budget, some companies have a stock slice program. This will allow you to purchase fractional shares for as low as $5.

    Investing in Index Funds

    Index funds buy shares and try to duplicate the performance of top stock market benchmarks such as the Dow Jones Industrial Average or S&P 500. 

    To invest in index funds, you must sign up with a traditional broker and decide the amount of capital you’d like to invest before funding. 

    Once the decision is made, choose the index fund you want to purchase and buy it through your broker.

    Before you invest in an index fund, confirm that the amount of the funds aligns with the amount you plan to invest. 

    Compare the payout ratio to other funds before investing. Then, look for an index fund with a low expense ratio.

    Companies in the S&P 500

    According to the current index weight, below are the top 10 companies in the S&P 500. 

    These companies listed below make up to 25% of the total value of the S&P stock index, and they are weighted according to the size of the company & its market cap in the S&P index.

    • Apple (AAPL):

    This is an Information Technology company that makes up 6.5% of the total value of the S&P index. This company has a current market cap of $2.7 Trillion and was added to the S&P 500 in 1982.

    • Amazon (AMZN):

    This consumer discretionary company makes up 2.7% of the total value of the S&P index. This company has a current market cap of $1.46 Trillion and was added to the S&P 500 in 2005.

    • Microsoft (MSFT):

    This is an Information Technology company that makes up 5.4% of the total value of the S&P index. This company has a current market cap of $2.4 Trillion and was added to the S&P 500 in 1994.

    • NVIDIA (NVDA):

    This is an Information Technology company that makes up 1.4% of the total value of the S&P index. This company has a current market cap of $1.1 Trillion and was added to the S&P 500 in 2001.

    • Alphabet (GOOGL):

    This company is listed on S&P as Alphabet Class A. It is a Communication Service company that makes up to 1.7% of the total value of the S&P index. This company has a current market cap of $1.7 Trillion and was added to the S&P 500 in 2014.

    • Tesla (TSLA):

    This consumer discretionary company makes up 1.3% of the total value of the S&P index. This company has a current market cap of $838 billion and was added to the S&P 500 in 2020.

    • Meta Platforms (META):

    This is a Communication Service company listed on the S&P 500 as Meta Class A. It makes up 1.4% of the total value of the S&P index. This company has a current market cap of $776 billion and was added to the S&P 500 in 2013.

    • Alphabet (GOOG):

    If you notice, we already listed Alphabet earlier. This is because Google’s parent company, Alphabet, has more than one class of shares. This Alphabet share is listed as Alphabet Class C. It makes up 1.5% of the total value of the S&P index. It was added to the S&P 500 in 2006 (a different time from Alphabet Class A stocks).

    • Berkshire Hathaway (BRK.B):

    This is a Financial company listed on the S&P 500 as Berkshire Hathaway Class B. It makes up to 1.6% of the total value of the S&P index. This company has a current market cap of $800 billion and was added to the S&P 500 in 2010.

    • UnitedHealth Group (UNH):

    This healthcare company makes up 1.3% of the total value of the S&P index. This company has a current market cap of $444 billion and was added to the S&P 500 in 1994.

      What is an S&P 500 Index Fund?

      S&P 500 index fund is a mutual fund that monitors the performance of the S&P index fund. 

      This investment strategy duplicates the performance of the S&P 500 by purchasing the same stocks in the index.

      This index fund is easy to use and has low fees. Because of this, it has gained popularity amongst individual and institutional investors. 

      An S&P 500 index fund can be purchased through a financial advisor or a traditional taxable broker.

      S&P 500 vs. Nasdaq 100 vs. Dow Jones

      S&P 500, Nasdaq 100, and Dow Jones are the most followed stock market indices in the U.S. These market indices have some similarities, but there are significant differences between them:

      • S&P 500 monitors the performance of 500 large-cap companies in the U.S.
        In comparison,
        Dow Jones monitors 30 large-cap companies in the U.S.
        Nasdaq 100 monitors the performance of 100 large non-financial companies on the Nasdaq stock exchange.

      • For S&P 500 and Nasdaq 100, the company’s value is determined by its market cap. But for Dow Jones, a company’s value is measured by its stock price.
      • S&P focuses on 500 of the most extensive U.S. stocks. Nasdaq 100 focuses on more than 3,000 stocks. Dow Jones is considered a blue-chip index for 30 stocks.
      • S&P 500 and Nasdaq 100 cover all the 11 major U.S. sectors. Their top sector is the technology sector. Dow Jones covers nine sectors, and its primary sector is financial services.

      Conclusion

      There you have it: the S&P 500 index is the most quoted and followed stock index worldwide. 

      It tracks the largest companies in the US and provides a base for new time and expert investors to invest their funds for compound returns

      To start investing in the S&P 500, you should meet a trusted financial advisor. However, BitDelta is an excellent platform for investing in the S&P 500 and other traditional assets. 

      With the help of our financial experts, who are there to help you and guide you through the process, be rest assured that you are in safe hands.

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