The S&P 500 is a stock index that tracks 500 of the largest, publicly-traded companies in the US.
The S&P 500 is generally used as a benchmark figure by investors. That means they can use the index and compare it to their own investment portfolio to see how well their stocks have performed.
The S&P 500 is also used to gauge how the US economy is doing. If the index is increasing in value, that generally means the economy is doing well and vice versa.
As its name suggests, the S&P 500 is comprised of 500 companies.
To be a part of the index, a company has to meet certain requirements. S&P 500 firms must;
Companies can move in and out of the index if they stop being able to meet these requirements.
The market capitalisation of the companies on the S&P 500 varies dramatically. The largest companies on the list often have market capitalisations that are substantially larger than the other companies on the list.
The S&P 500 is structured in a way that takes these disparities into account. This is known as a weighting system as it gives greater influence to companies with larger market capitalisations, or ‘weight’, than it does to those with smaller ones.
The weighting system means that a company’s market capitalisation determines what percentage of the S&P 500 it makes up. For example, if one company made up 5 per cent of the total market capitalisation of all the companies on the S&P 500, it would be weighted so that 5 per cent of the index was comprised of that company.