S&P 500 explained
What is S&P 500?
The Standard & Poor’s 500 Index (otherwise known as the S&P 500 for short,) is regarded by investors as a crucial tool for measuring the health of the US economy.
It tracks the stocks of the biggest 500 companies that are publicly traded on the New York Stock Exchange or the Nasdaq.
These companies are chosen based on their market capitalization, otherwise known as the total value of their outstanding shares. For example, a tech company selling 25 million shares at $200 each would have a market cap of $5 billion.
The S&P 500 also weights the companies by their market capitalization, meaning that larger corporations have a bigger impact on the index. Critics of this formula argue that can conceal exceptionally good (or bad) performances by smaller companies.
How often is the list of 500 companies updated?
Unlike other indices that automatically include or exclude companies based on a list of requirements, a committee meets every three months to decide which 500 companies should make the cut. As of 2019, a company needed a market cap of $8.2 billion in order to be eligible.
Having a large market capitalization is not enough – a company must be based in the US, at least 50% of its stock must be available for the public to buy, and shares must cost $1 or more.
Who is on the list?
As of 2019, the three biggest sectors on the S&P 500 are information technology (21.1% of companies,) healthcare (14.2%) and financials (13.2%.)
Microsoft, Apple, Amazon, Facebook and Berkshire Hathaway are the five biggest constituent companies on the S&P 500 based on market capitalization.
Overall, the index covers 80% of available market capitalization – and on average, it has delivered annualized returns of 13.95% over the past 10 years.