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.
What companies are on the S&P 500?
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;
- Be based in the US
- Be listed on a US stock exchange
- Have a market capitalisation of at least $8.2 billion. Market capitalisation is the combined value of a company’s outstanding shares.
- Have been profitable in the prior quarter, as well as in the prior 4 quarters combined
- Have at least 250,000 of its shares traded in the prior 6 months
Companies can move in and out of the index if they stop being able to meet these requirements.
How is the S&P 500 structured?
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.
