S&P 500 Index

The Standard and Poor's 500 (S&P 500) is an index made up of 500 large-cap common stocks traded in the United States.  The stocks included in the S&P 500 index trade on either the New York Stock Exchange or the NASDAQ. 

Standard and Poor's 500 (S&P 500)

The Standard and Poor's 500 (S&P 500) is an index made up of 500 large-cap common stocks traded in the United States.  The stocks included in the S&P 500 index are publicly held companies that trade on either the New York Stock Exchange or the NASDAQ. 

 

S&P 500 Overview

The S&P 500 index was born in 1957, around the same time as the emergence of computer technology.  Computers made it practical to calculate and disseminate the 500 stock index in real time.  The index is updated every 15 seconds during trading sessions.  There are three S&P 500 index returns that are generally quoted.  These are:

  • price return index - dividends are not accounted for;
  • total return index - reflects the effects of dividend reinvestment;  and
  • net total return index - reflects the effects of dividend reinvestment after the deduction of withholding tax.

The S&P 500 is one of the most popular equity indices in the world as hundreds of billions of dollars have been invested in mutual funds, Exchange Traded Funds and other instruments that track the performance of the S&P 500 index. The index is included in the Index of Leading Indicators as it reflects the health of the American economy.



S&P 500 Calculation

The index is weighted according to the movements in the prices of stocks with higher market capitalization.  Stocks with higher market caps have a greater effect on the index than companies with smaller market caps.  Starting in 2005, the index transitioned to a "float weighting".  As a result of the change the weighting now only includes the number of shares available for public trading. 

In order to prevent the value of the index from changing as a result of corporate financial actions, and to keep the S&P 500 Index comparable across time, a divisor adjustment is used to adjust the index for actions affecting the market value of the index. These actions include stock splits, share issuance, buy back, dividends and restructuring events.  Also, when a company is replaced by another with a different market capitalization, the divisor needs to be adjusted so that the S&P 500 Index remains constant.  Divisor adjustments are made after the calculation of the closing value of the S&P 500 Index.



Application of S&P 500

The S&P 500 is one of the most commonly used benchmarks for the overall U.S. stock market and is frequently used as the standard for investment performance reflecting the risk/return characteristics of the large cap universe.  The S&P 500 is a leading indicator of U.S. equities.

Many financial products are based on the S&P 500. These include index funds and exchange-traded funds.  This makes it possible for individual investors to participate in the purchase of the "index" in the form of a mutual fund or ETF.

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