Business, Legal & Accounting Glossary
The S&P 500 Index is a well known and followed equity index representing 500 leading large-sized US companies in various key industries. The S&P 500 Index goes back to the early 1920s but officially included 500 companies in 1957. The S&P 500 Index represents over 75% of the entire U.S. equity market so it is considered a benchmark for the entire US market. The S&P 500 Index is weighted by market capitalization. The S&P 500 Index includes large-cap stocks with a market capitalization above US$5 billion dollars. To be included in the S&P 500 Index, a company must be a US company with strong financials (i.e. as reported earnings must be positive for 4 quarters in a row). An S&P 500 Index company must have good liquidity. An S&P 500 Index company must also be an operating type of company (i.e. no holding companies for example but REITs are allowed). The S&P 500 index is calculated by Standard and Poor’s in accordance with published specifications. The S&P 500 Index is reconstituted on an as-needed basis by S&P economists and index experts, members of the S&P Index Committee. The S&P 500 Index is part of the S&P Global 1200 Index. Various Exchange-traded Funds (ETF), futures, options, and mutual funds offer investment vehicles to trade the S&P 500 Index.
The S&P 500 is an index containing the stocks of 500 Large-Cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor’s, a division of McGraw-Hill. S&P 500 is used in reference not only to the index but also to the 500 actual companies whose stocks are included in the index.
The S&P 500 index forms part of the broader S&P 1500 and S&P Global 1200 stock market indices.
All of the stocks in the index are those of large publicly held companies and trade on the two largest US stock markets, the New York Stock Exchange and Nasdaq. After the Dow Jones Industrial Average, the S&P 500 is the most widely watched index of large-cap US stocks. It is considered to be a bellwether for the US economy and is a component of the Index of Leading Indicators. It is often quoted using the symbol SPX or INX, and may be prefixed with a caret (^) or with a dollar sign ($).
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 attempting 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.
In stock and mutual fund performance charts, the S&P 500 index is often used as a baseline for comparison. The chart will show the S&P 500 index, with the performance of the target stock or fund overlaid.
The S&P 500 index was created in 1957, but it has been extrapolated back in time. The first S&P index was introduced in 1923. Prior to 1957, the primary S&P stock market index consisted of 90 companies, known as the “S&P 90”, and was published on a daily basis. A broader index of 423 companies was also published weekly. On March 4, 1957, a broad, real-time stock market index, the S&P 500 was introduced. This introduction was made possible by advancements in the computer industry which allowed the index to be calculated and disseminated in real-time.
The S&P 500 is used widely as an indicator of the broader market, as it includes both “growth” stocks (which inflated and then deflated in the dot-com bubble and bust) and generally less volatile “value” stocks; it also includes stocks from both the NASDAQ stock market and the NYSE. The index, near the height of the bubble, reached an all-time intraday high of 1,552.87 in trading on March 24, 2000, and then lost approximately 50% of its value in a two-year bear market, spiking below 800 points in July 2002 and reaching a low of 768.63 intraday on October 10, 2002. Since then, the US stock markets gradually recovered, but the S&P 500 lagged the popular Dow Jones Industrial Average and total-market Wilshire 5000 indices by remaining below its highs of 2000 for a longer period. On May 30, 2007, the S&P 500 closed at 1,530.23 to set its first all-time closing high in more than seven years. On July 13, 2007, the index followed a nearly thirty-point gain the previous day by setting a new intra-day record of 1,555.10 points, its first of the 21st century.
The components of the S&P 500 are selected by committee. This is similar to the Dow 30, but different from others such as the Russell 1000, which are strictly rule-based.
The index does include a handful (13 as of July 6, 2007) of non-U.S. companies. This group includes both formerly American companies that are now incorporated outside of the United States, but which were grandfathered and allowed to remain in the S&P 500 after their expatriation, and companies that have never been incorporated in the United States. Notably, after the merger of Daimler-Benz and Chrysler, the S&P did not include the newly created German Aktiengesellschaft (company) in the index.
The committee selects the companies in the S&P 500 so they are representative of various industries in the United States economy. In addition, companies that do not trade publicly (such as those that are privately or mutually held) and stocks that do not have sufficient liquidity are not in the index – a notable example of an illiquid stock not in the index is Berkshire Hathaway, which as of April 3, 2006, had a market capitalization larger than all but 12 of the members of the S&P 500, but which also had a stock price (in the case of its class A shares) greater than $100,000, and so was very difficult to trade. By contrast, the Fortune 500 attempts to list the 500 largest public companies in the United States by gross revenue, regardless of whether their stocks trade or their liquidity, without adjustment for industry representation and excluding companies incorporated outside the United States.
The index was previously market-value weighted; that is, movements in the price of companies whose total market valuation (share price times the number of outstanding shares) is larger will have a greater effect on the index than companies whose market valuation is smaller.
The index has since been converted to float weighted; that is, only shares which Standard & Poors determines are available for public trading (“float”) are counted. The transition was made in two tranches, the first on March 18, 2005, and the second on September 16, 2005. (For example, only the Class A shares of Google (“GOOG”) are publicly traded; thus, of the 207,096,000 total shares outstanding as of March 2006, only the 199,570,000 Class A shares were considered float, so only the value of the latter number of shares was used to incorporate Google into the S&P 500 on March 31, 2006.) 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.
Apart from purchasing the individual stocks in the S&P 500, investors may also purchase shares of an exchange-traded fund (ETF) which represents ownership in a portfolio of the equity securities that comprise the Standard & Poor’s 500 Index. One of these ETF’s is called the Standard & Poor’s Depositary Receipts (SPDRs, pronounced “spiders”), and the ticker symbol is SPY. Typical volume for the SPDR is over 200 million shares per day—the highest of any US stock. There is also the iShares S&P 500 (Symbol:IVV), which is similar to the SPDRs, but is structured differently. Rydex also offers an ETF, Rydex S&P Equal Weight (Symbol:RSP), which provides equal exposure to all the companies in the S&P 500.
The relatively compact units of these ETFs represent an opportunity for the smaller investor to achieve a performance close to the S&P 500 Index (minus fees and expenses). They trade like any other stock on the American Stock Exchange, so they can be bought on margin, sold short, or held for the long term. Both the SPDRs and the iShares have a management expense ratio of under 0.1% a year, making them an efficient proxy for the underlying index.
Several mutual fund managers also provide index funds that track the S&P 500, the first of which was The Vanguard Groups.
Additionally, the Chicago Mercantile Exchange (CME) offers futures and options on the S&P 500 index. S&P futures can be traded on the exchange floor in an open outcry auction, or on CME’s Globex platform, though only E-mini contracts are traded on Globex during regular trading hours.
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This glossary post was last updated: 25th April, 2020 | 0 Views.