What Does the S&P 500 Tell You About Stocks?

How the S&P 500 Tells You About America's Health

NYSE outside
The New York Stock Exchange, where the shares of the companies listed by the S&P 500 are traded.. Photo: Spencer Platt/Getty Images

Definition: The S&P 500 stands for the Standard and Poor 500. It is a stock market index that tracks the 500 most widely held stocks on the New York Stock Exchange or NASDAQ. It seeks to represent the entire stock market by reflecting the risk and return of all large cap companies. 

How It Works

The S&P 500 tracks the market capitalization of the companies in its index. Market capitalization is the total value of all the shares of stock a company has issued.

It captures 80% of the total market cap.

To be included in the S&P 500, a company must be a U.S. company with a market cap of at least $5.3 billion. At least 50% of its stock must be available to the public. Its stock price must be at least $1 per share. Finally, it must have at least four consecutive quarters of positive earnings. The S&P 500 also includes Real Estate Investment Trusts (REITs) and business development companies. (Source: S&P Dow Jones Indices Methodology)

The top ten largest companies in the S&P 500 in 2015 were (listed by a weighted market cap): Apple, Microsoft, Exxon Mobil, Johnson & Johnson, General Electric, Wells Fargo, Berkshire Hathaway, JP Morgan Chase,  Pfizer, and Procter & Gamble. The market cap of these ten companies represents 17.4% of the market cap of the total S&P 500.

The S&P 500 reflects the industries in the economy. The sector percentages in the S&P 500 in 2010 were: Information Technology (17.8%), Financial (15.1%), Energy (12.7%), Industrials (11.3%), Consumer Staples (10.6%), Consumer Discretionary (10.6%), Materials (3.7%), Utilities (3.4%), Telecom Services (3.1%).

(Source: S&P 500 Factsheet)

How Is the S&P 500 Different from Other Stock Market Indices?

The S&P 500 has fewer large cap stocks than the Dow Jones Industrial Average. The Dow tracks the share price of 30 companies which best represent their industries. Its market capitalization accounts for nearly one-quarter of the total U.S. stock market.

The Dow is the most quoted market indicator in the world.

The S&P 500 also has less technology related stocks than the NASDAQ. All of these stock indices move pretty closely together, so if you focus on one, you will understand how well the stock market is doing. In other words, you don't really have to follow all three.

History and Ownership

The S&P 500 was created in 1957 by Standard & Poor. McGraw-Hill acquired it in 1966. The S&P Dow Jones Indices owns it now. That is a joint venture between McGraw Hill Financial, CME Group, and News Corp, the owner of Dow Jones. The S&P Dow Jones Indices publish over one million indices. (Source: History, Standard & Poor)​

How to Use the S&P 500 to Make Money

The S&P 500, like any measurement of the stock market, is often used as an leading economic indicator of how well the U.S. economy is doing. If investors are confident in the economy, they will buy stocks. Some experts believe the stock market can often predict by about six months what the savviest investors think the economy will be doing.

Besides following the S&P 500, you should also follow the bond market. Generally, when stock prices go up, bond prices go down. There are many different types of bonds. These include Treasury Bonds, corporate bonds, and municipal bonds. Bonds also provide some of the liquidity that keeps the U.S. economy lubricated. Their most important effect is on mortgage interest rates. To help you do this, Standard & Poor's, the company that created the S&P 500, also rates bonds.

The S&P 500 only measures U.S. stocks. You should also keep an eye on foreign markets, especially emerging markets like China and India. It's also good to keep 10% of your investments in commodities, like gold

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