The S&P 500 and How It Works

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

what to know about the s&P 500

The Balance / Hilary Allison

The S&P 500 is a stock market index that tracks the stocks of 500 large-cap U.S. companies. It represents the stock market's performance by reporting the risks and returns of the biggest companies. Investors use it as the benchmark of the overall market, to which all other investments are compared.

As of Aug. 31, 2020, the S&P 500 had an average 10-year annual return of 12.66%. S&P stands for Standard and Poor, the names of the two founding financial companies.

The S&P 500 was officially introduced on March 4, 1957, by Standard & Poor. McGraw-Hill acquired it in 1966. The S&P Dow Jones Indices owns it now and that's a joint venture between S&P Global (formerly) McGraw Hill Financial, CME Group, and News Corp, the owner of Dow Jones.

How the S&P 500 Works

The S&P 500 tracks the market capitalization of the companies in its index. Market cap is the total value of all shares of stock a company has issued. It's calculated by multiplying the number of shares issued by the stock price. A company that has a market cap of $100 billion receives 10 times the representation as a company whose market cap is $10 billion. As of July 2020, the total market cap of the S&P 500 was $27.05 trillion. 

The index is weighted by a float-adjusted market cap. It only measures the shares available to the public. It does not count those held by control groups, other companies, or government agencies.

A committee selects each of the index's 500 corporations based on their liquidity, size, and industry. It rebalances the index quarterly, in March, June, September, and December.

To qualify for the index, a company must be in the United States and have an unadjusted market cap of at least $11.8 billion. At least 50% of the corporation's stock must be available to the public. Its stock price must be at least $1 per share. It must file a 10-K annual report. At least 50% of its fixed assets and revenues must be in the United States. Finally, it must have at least four consecutive quarters of positive earnings.

The stock can't be listed on pink sheets or traded over the counter. It must be listed on the New York Stock Exchange, Investors Exchange, Nasdaq, or BATS Global Markets.

As of Aug. 31, 2020, the 10 largest companies, with a weighted market cap, in the S&P 500 were:

  1. Apple Inc.
  2. Microsoft Corp.
  3. Inc.
  4. Facebook Inc. A
  5. Alphabet Inc. A (GOOGL)
  6. Alphabet Inc. C (GOOG)
  7. Johnson & Johnson
  8. Berkshire Hathaway B
  9. Proctor & Gamble
  10. Visa Inc. A

The makeup of the S&P 500 industries reflects that of the economy.

As of Aug. 31, 2020, the S&P 500 sector breakdown included:

  • Information Technology: 27.5%
  • Health Care: 14.6%
  • Consumer Discretionary: 11.2%
  • Communication Services: 10.9%
  • Financials: 9.9%
  • Industrials: 7.9%
  • Consumer Staples: 7.0%
  • Utilities: 3.1%
  • Real Estate: 2.8%
  • Materials: 2.6%
  • Energy: 2.5%

S&P 500 vs. Other Stock Market Indexes

The S&P 500 has more large-cap stocks than the Dow Jones Industrial Average. The Dow tracks the share price of 30 companies that best represent their industries. Its market capitalization accounts for almost one-quarter of the U.S. stock market. The Dow is the most quoted market indicator in the world.

The S&P 500 has fewer technology-related stocks than the Nasdaq. As of April 2020, 57% of Nasdaq allocations were in information technology compared to 23% for the S&P 500 at that time.

Despite these differences, all these stock indexes tend to move together. If you only focus on one, you will still be able to understand how well the stock market is generally doing. In other words, you don't have to follow all three.

Milestones of the S&P 500

The following table shows various milestone events of the S&P 500, including both highs and lows, and other memorable moments.

Date Close Event
Jan. 3, 1950 16.66 Record closing low, first close
June 4, 1968 100.38 First time above 100
Oct. 19, 1987 224.84 Black Monday
March 24, 1995 500.97 First close above 500
Feb. 2, 1998 1,001.27 First close above 1,000
Oct. 9, 2007 1,565.15 Highest close before financial crisis
Oct. 13, 2008 1,003.35 Largest % gain of 11.6%
March 28, 2013 1,569.19 New record high
Aug. 26, 2014 2,000.02 First close above 2,000
Sept. 21, 2018 2,929.67 New record high
Oct. 3, 2018 2,937.06 Highest intra-day
July 12, 2019 3,013.77 First close above 3,000
Feb. 19, 2019 3,393.52 New record high
March 12, 2020 2,480.64 Largest % decline since Black Monday, entered bear market
March 23, 2020 2,237.40 Stock crash low
August 18, 2020 3,389.78 New record high, end of bear market
August 24, 2020 3,431.28 Breaks 3,400
August 28, 2020 3,508.01 Closes above 3,500

How To Use the S&P 500 to Make Money

Although you can't invest in the S&P, you can mimic its performance with an index fund. You could also buy shares of stocks that are in the S&P 500.

Be sure to weigh the stocks in your portfolio according to their market cap, as the S&P does.

You should use the S&P 500 as a leading economic indicator of how well the U.S. economy is doing. If investors are confident in the economy, they will buy stocks.

Since the S&P 500 only measures U.S. stocks, you should also monitor foreign markets. That includes emerging markets like China and India. It may also be a good idea to keep 10% of your investments in commodities, like gold. They tend to hold value longer when stock prices drop.

Besides following the S&P 500, you should also follow the bond market. Standard & Poor's also gives bonds credit ratings. When stock prices go up, bond prices go down. There are many different types of bonds. They include Treasury bonds, corporate bonds, and municipal bonds. Bonds provide some of the liquidity that keeps the U.S. economy lubricated. Their most important effect is on mortgage interest rates.

Key Takeaways

  • Investors usually look at the S&P 500 to assess how the overall stock market is doing. As such, this index is considered a leading U.S. economic indicator.
  • It tracks 500 publicly traded, large-cap U.S. companies. These businesses must meet specific criteria in order to be a part of the S&P 500. The mix of industries that make up the S&P 500 list often reflects the economic makeup of the United States.
  • Investors can purchase shares of stocks listed on the S&P 500 or invest in index funds that track the S&P 500.

Frequently Asked Questions (FAQs)

How do you invest in the S&P 500?

You can't invest directly in the S&P 500, but you can invest in specific companies that are included in its index. You can also invest in S&P 500 index funds that are designed to closely follow the performance of the S&P 500.

What companies are in the S&P 500?

At a minimum, companies must have an unadjusted market cap of $11.8 billion in order to qualify for inclusion in the S&P 500. They must also meet specific criteria in terms of liquidity and profitability.

What does the S&P 500 measure?

The S&P 500 tracks the value of the 500 stocks currently in its index. These stocks represent 500 of the largest companies in the U.S. based on market capitalization.