Posted by Larry Kenneth Hurt

How the S&P 500 works

How the S&P 500 works

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

In the past ten years, it has rebounded to 9.49% per year. In 2017, it decreased by 21.83%. S & P represents Standard and Poor, the names of the two founding financial companies.

History and properties

The S & P 500 was formally launched on March 4, 1957, by Standard & Poor. McGraw-Hill bought it in 1966. The S & P Dow Jones Indices are now the owners. It is a joint venture between McGraw Hill Financial, CME Group, and News Corp, owner of Dow Jones. S & P publishes more than one million indices.

How it works

The S & P 500 keeps tracks of the market capitalization of its index companies. Market capitalization is the total value of all shares issued by a company. It is determined by multiplying the number of shares issued by the share price. A company with a market capitalization of $ 100 billion is represented ten times as a company with a market capitalization of $ 10 billion. The total market capitalization of the S & P 500 is $ 23.5 billion. It captures 80% of market capitalization.

The index is weighted by the fluctuation in market capitalization. It measures only available stocks to the public. It does not include those who have control groups, other companies, or government agencies.

A committee selects each of the 500 companies in the index based on their liquidity, size, and sector. It rebalances the quarterly index in March, June, September, and December. To be qualified for the index, a company must be located in the United States and have a market capitalization of at least $ 6.1 billion. At least 50% of the company's shares must be publicly available. The price of your shares must be at least $ 1 per share. An annual report of $ 10,000 is required, of which at least 50% of the fixed assets and revenues must be in the United States. Finally, you must have at least four quarters of positive earnings.

The S & P covers real estate investment funds and commercial development companies. The shares must be listed on the New York Stock Exchange, Investor Exchange, NASDAQ, or BATS. It cannot be sold over the counter or appears on pink sheets.

In 2017, the top 10 weighted-cap companies in the S & P 500 were Apple; Microsoft; Amazon; Berkshire Hathaway B; Facebook; JPMorgan Chase; Johnson and Johnson; Exxon Mobil; Alphabet C, formerly Google; and the alphabet A.

The composition of the S & P 500 industries reflects that of the economy. According to the S & P, Dow Jones Indexes, the 2017 S & P 500 Industrial Division was as follows:

  • Information Technology: 24.9%.
  • Finance: 14.7%.
  • Health care: 13.7%.
  • Discretionary consumption: 12.7%.
  • Industrial: 10.2%.
  • Consumer goods: 7.7%.
  • Energy: 5.7%.
  • Utility: 2.9%.
  • Materials: 2.9%.
  • Real estate: 2.8%.
  • Telecommunications services: 1.9%.

The major difference between the S & P 500 and other stock indexes

The capitalization stocks of the S & P 500 are above the Dow Jones Industrial Average. Dow tracks the stock prices of 30 companies that best represent its industries. It's market capitalization represents nearly a quarter of the US stock market. UU. Dow is the highest-rated market indicator in the world.

The S & P 500 has fewer technology shares than the NASDAQ. NASDAQ also includes shares of private companies.

Despite these variations, all these stock indices tend to evolve together. If you concentrate on one, you will understand how the stock market works. In other words, you do not have to follow all three.

How to use the S & P to make money

Although it is not possible to invest in S & P, it is possible to replicate your performance with an indexed S & P fund. You can also buy stocks that are part of the S & P 500 Index. Make sure you weigh them in your portfolio based on market value, just like the S & P index.

You must use the S & P 500 as the main economic indicator of the evolution of the US economy. If investors trust the economy, buy stocks. Some experts believe that the stock market can predict what the savviest investors will do in about six months.

In addition to complying with the S & P 500 Index, you must also follow the bond market. When stock prices rise, bond prices fall. There are many types of bonuses. These include treasury bills, municipal bonds, and corporate bonds. Bonds give some of the liquidity that keeps the US economy going. Its most important effect is on mortgage interest rates. To help you track the bond market, S&P also assesses bonds.

Since the S & P 500 measures only US securities, it must also monitor the foreign market. This includes emerging markets such as China and India. It is also useful to maintain 10% of investments in commodities, such as gold. They tend to be more valuable when stock prices fall.

Larry Kenneth Hurt
Contact This Member