An Index consisting of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value weighted index (stock price times number of shares outstanding), with each stock’s weight in the Index proportionate to its market value.
Some say, it’s a company that rates stocks and corporate and municipal bonds according to risk profiles and that produces and tracks the S&P indices. S&P also publishes a variety of financial and investment reports.
The S&P 500 is considered to be a benchmark of the overall stock market.
What is an Index?
The first and consequently most widely known index was created back on May 26, 1896 by Mr. Charles Dow. At that time the Dow index contained 12 of the largest public companies in the US. Today, the Dow Jones Industrial Average (DJIA) contains 30 of arguably the largest and most influential companies in the US and World economy. We will discuss the composition of the DJIA later in this tutorial.
The basic definition of an index is “a statistical measure of the changes in a portfolio of stocks representing a portion of the overall market”.
Before the computer age, calculating the price of a stock market index had to be kept as simple as possible. The original DJIA was calculated by adding up the prices of the 12 companies and then dividing that number by 12. These calculations were actually more like an average than an index, but it served its purpose.
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Today computers do most of the work and the indexes are much more accurate to the market. For example, many of the larger indexes now are based on the market capitalization of a company’s stock rather than the stock price alone.
Each stock index is slightly different. They include different types and amounts of stock. Some are even calculated in a slightly different manner to portray a different statistical measure.
The Standard & Poors 500 Index
As we just mentioned, the main problem with the DJIA is that it only contains 30 companies. The S&P 500 attempts to fix that problem by including 500 companies. As a result the index includes over 2/3 (at time of writing) of US market capitalization. More and more, it is being considered to be the benchmark of the US stock markets. Furthermore when mutual funds state that they have outperformed the market they are usually referring to the S&P 500.
Created By:Standard and Poor’s Index Services
Number of Companies:500
Types of Companies:Various – the S&P 500 tries to cover all major areas of the US Economy. Keep in mind the S&P is not the 500 largest companies, it is the most widely held 500 companies chosen for market size, liquidity, and their industry.
Value of the Index (approx.):$12.5 Trillion
How it’s Calculated:The S&P 500 is considered to be a “market-weighted index”. This means every stock in the index is represented in proportion to its total market capitalization.
Advantages: The S&P 500 is one of the best benchmarks in the World. By containing 500 companies is has great diversification. The performance of the S&P 500 is considered one of the best overall indicators of market performance and mutual fund manager’s goal is to beat it.
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Disadvantages: The top 45 comprise more than 50% of the indices value. Another disadvantage is there is very little foreign content.
S&P 500 Global Industry Classification Standard (GICS) Sectors
As of April 30, 2002
Number of Cos.% of Market Capitalization
Consumer Discretionary 87 13.7 %
Consumer Staples34 9.7 %
Energy24 7.0 %
Financials75 19.2 %
Health Care 45 14.2 %
Industrials68 10.7 %
Information Technology 80 15.2%
Materials37 2.9 %
Telecommunication Services 13 4.1 %
Utilities37 3.3 %
Industrials (Composite)378 76.7%
S&P 500 Exchange Representation
As of April 30, 2002
Number of Cos. % of Market Capitalization
NYSE419 86.1%
NASDAQ79 13.8 %
AMEX2 0.1 %
S&P 500 Statistics
As of April 30, 2002
Total Market Value ($ Billion)9,858
Mean Market Value ($ Million)19,715
Median Market Value ($ Million)8,386
Weighted Ave. Market Value ($ Million) 89,373
Largest Cos. Market Value ($ Million) 313,469
Smallest Cos. Market Value ($ Million) 354
Median Share Price ($)36.820
P/E Ratio43.62
Indicated Dividend Yield (%)1.48
At month-end (April 2002), the S&P 500 Index represented approximately 78% and the S&P MidCap 400 represented 7% and the S&P SmallCap 600 represented 3% of the market value of S&P’s internal database of over 7296 equities. Combined, the S&P Equity Indices represented 88%.
