The Standard and Poor’s 500 stock index, or S&P 500, tracks large cap U.S. equities. The Standard and Poor’s 500 stock index owns shares of 500 companies. A stock index like the S&P 500 is a group of stocks that represents specific industries, company sizes, business practices, etc. Because it covers over 75 percent of American equities, the Standard and Poor’s 500 stock index is considered a good judge of the entire U.S. economy and stock market.
A stock exchange facilitates the trading of its listed stocks. The S&P 500 companies must be listed on the New York Stock Exchange or NASDAQ. To be admitted to the Standard and Poor’s 500 stock index, a company’s public float–the percentage of shares that is available for public purchase–must be at least 50 percent. In addition, S&P 500 companies must have a market capitalization of $4 billion or more. A company’s market capitalization depicts a company’s size based on the current price of one share multiplied by the number of outstanding shares.
Stock Index Investing
Investors wanting to invest in the overall stock market as a whole and not individual equities have the option of purchasing investments through ETFs and mutual funds that track the performance of indexes like the S&P 500. Investors may choose a stock index such as the S&P 500 for many reasons, including:
- Wide-scale benefits without purchasing individual stocks. Risk exposure to the Standard and Poor’s 500 stock index fund is divided among the 500 companies it represents through a very calculated balancing system. Due to the diversification of the Standard and Poor’s 500, investing in S&P 500 funds can sometimes create better returns than individual picks.
- Cheap expense ratios due to passive investing. Even companies that mimic S&P 500 returns just invest in the same companies as the Standard and Poor’s 500.
The S&P 500 is one of the most important barometers in measuring the health of the U.S. stock market. Along with the Dow Jones Industrial Average and the Nasdaq Composite, it is one of the three most referred to stock indices on Wall Street.
