S&P 500 explained
An index measuring the performance of the 500 biggest publicly traded companies in the US
What is the S&P 500?
The Standard & Poor’s 500 Index (or 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 500 companies are chosen based on their market capitalisation, 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 500 companies by market capitalisation, meaning that larger corporations have a bigger impact on the index. Critics of this formula argue that it can conceal exceptionally good (or bad) performances by smaller companies.
How often is the list 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. A company now needs a market cap of $13.1bn in order to be eligible.
Having a large market capitalisation 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 2021, the three hottest sectors on the S&P 500 are energy, financials and real estate.
Microsoft, Apple, Alphabet, Amazon, and Tesla Facebook are the five biggest constituent companies on the S&P 500 based on market capitalisation.
Overall, the index covers 80% of available market capitalisation and, on average, has delivered annualised returns of 10.7% over the past 30 years.
