S&P 500 Index Explained

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What Does the S&P 500 Index Measure and How Is It Calculated?

The S&P 500 measures the value of the stocks of the 500 largest corporations by market capitalization listed on the New York Stock Exchange or Nasdaq Composite. The intention of Standard & Poor’s is to have a price that provides a quick look at the stock market and economy. Indeed, the S&P 500 index is the most popular measure used by financial media and professionals, while the mainstream media and the general public might be more familiar with the Dow Jones Industrial Average.

The S&P 500 index is a float-adjusted market-cap weighted index. It’s calculated by taking the sum of the adjusted market capitalization of all S&P 500 stocks and then dividing it with an index divisor, which is a proprietary figure developed by Standard & Poor’s.

Being float-adjusted, the index is continuously recalculated based on the shares trading. The divisor is adjusted when there are stock splits, special dividends, or spinoffs that could affect the value of the index. The divisor ensures that these non-economic factors do not affect the index.

The index is calculated as follows:

S & P 5 0 0 I n d e x = Market Cap for All S&P 500 Stocks Index Divisor

Index = \dfrac<\text><\text> S & P 5 0 0 I n d e x = Index Divisor Market Cap for All S&P 500 Stocks ​

S&P 500 Pitfalls

One result of this methodology is that the index is weighted toward larger-cap companies.

For example, on Dec. 17, 2020, the largest component was Microsoft at $802 billion. Compare that to the likes of Adobe, which has a $110 billion market cap. The total market capitalization of all the companies in the index was $23.3 trillion.

The weighted average market capitalization of each individual component is then determined by dividing the market capitalization of the individual component by $23.3 trillion. Microsoft’s weighting is determined by taking its market capitalization and dividing it by the total index market cap.

The formula for determining this weighting is as follows:

Therefore, using the same example, Microsoft has a 3.4% weighting, while a smaller company like Adobe has a 0.5% weighting in the index. This leads to the mega-cap stocks having an outsized impact on the index. Sometimes, this index structure can mask strength or weakness in smaller companies if larger-cap companies are diverging. In other ways, this index structure better represents the overall economy than indexes in which weighting is determined by an equal share or an index that is price weighted.

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S&P 500 Positives

The S&P 500 is considered an effective representation for the economy due to its inclusion of around 500 companies, which covers all areas of the United States and across all industries. In contrast, the Dow Jones Industrial Average (DJIA) is comprised of 30 companies, leading to a more narrow reflection. Further, the DJIA is a price-weighted index, so the largest weighted components are determined by its stock price rather than some fundamental measure.

The S&P 500 is a broader representation, having more stocks and covering every industry. The DJIA is limited and the movement of a stock in the DJIA can have a greater impact than that of the S&P 500. The largest weighted stock in the S&P 500 likely has a smaller weighting than the largest weighted stock in the DJIA. The movement of a few companies can have a profound impact on the DJIA.

How Many Stocks Are in the S&P 500?

A Look at Standard and Poor’s Growth

How many stocks are in the Standard and Poor’s 500 (S&P 500) index? It’s not as easy as you think! While most people would assume that the correct answer is 500, that is wrong. There are actually more than 500 stocks in the index… and the current number will increase even more later this year.

Why Are There More than 500 Stocks in the S&P 500?

Technically, the S&P 500 is an index of the stocks of 500 large companies on the New York Stock Exchange (NYSE) and NASDAQ Stock Market, weighted by market capitalization. So how can there be more than 500 stocks in the index when only 500 companies are included?

Companies listed in the index may have issued multiple types of common stock. The S&P 500 index has decided to include more than one type of common stock for some companies listed in the index. However, not all forms of common stock for every company are included. Instead, the S&P 500 picks and chooses which companies will have more than one class of common stock included.

How Many Stocks Are Currently in the S&P 500?

Currently, there are 502 stocks in the S&P 500. The two companies that have more than one form of common stock in the index are Discover Financial, which has stock tickers DFS and DISCA included, and Google, which has stock tickers GOOG and GOOGL included.

However, there are plans to add multiple forms of common stock for three additional companies in September 2020. These companies include Comcast, which will have stock tickers CMCSA and CMCSK listed; 21st Century Fox, which will have stock tickers FOX and FOXA listed; and News Corp., which will have stock tickers NWS and NWSA listed. This will bring the number of stocks in the S&P 500 to 505 later this year.

Why Do Some Companies Have More than One Type of Common Stock?

Companies often have more than one type of common stock when those who control the company wish to raise money while still keeping control of the company. One way to do this is by offering different shareholder rights for each different class of stock.

For instance, a company may issue 100 A shares that offer ten votes per share of common stock and at the same time issue 750 B shares that only get one vote per share of common stock. If those in leadership of the company own all of the A shares, they would have 1,000 votes and could easily overrule any proposals from those with B shares, who would only have 750 votes.

While this example is basic, multiple forms of stock can get complicated very fast and differ from company to company.

Will the Number of Stocks in the S&P 500 Continue to Grow?

Potential exists for the number of stocks in the S&P 500 index to continue growing in the future. Thirteen companies currently have two or more classes of common stock while there are only five companies that the S&P 500 will include in 2020. This will allow for the potential of even more stocks entering the S&P 500 in the future.

However, the decisions appear to be made on a case-by-case basis in order to represent what is truly occurring in the stock market from day to day. Different classes of stocks may trade at different prices or follow different trading patterns, which may be why some companies have multiple classes of stock included while others do not.

As companies grow or shrink, the S&P 500 may reorganize to include a different 500 companies and return to including only 500 stocks once again. But until it does, but your friends they don’t know how many stocks are in the S&P 500 and you’re bound to win (unless your friends read MoneyTips)!

Here’s What a $10,000 Investment in an S&P 500 Index Fund in 1980 Would Be Worth Today

Warren Buffett has said this is his favorite investment for most people, and here’s why.

In recent years, a lot of investor money has been flowing into index funds. Investors seem to love the low-cost nature of index fund investing, as well as the diversification and ease that comes with them.

This certainly makes sense, but is it possible to make serious money by simply investing in index funds? The answer will surprise you. Here’s a look at what would have happened if you had put money into an S&P 500 index fund in 1980 (38 years ago) and had simply reinvested your dividends along the way.

Image source: Getty Images.

What is an S&P 500 index fund?

An S&P 500 index fund is an investment vehicle, either in mutual fund or exchange-traded fund (ETF) form, that invests in the 500 stocks that comprise the S&P 500 index, in market cap-weighted proportions.

While fees vary, these tend to be extremely cheap ways to invest. As of this writing, S&P 500 ETFs can be found with expense ratios as low as 0.03%. This means that for every $10,000 you have invested, fees will only be $3 per year.

Warren Buffett’s favorite investment

Billionaire investor Warren Buffett has said that an S&P 500 index fund is the best investment most Americans can make. In fact, he’s said that he wants his own wife’s money invested in such a fund after he’s gone. This might seem a bit surprising, as Buffett is well-known for his stock-picking ability.

First of all, he isn’t necessarily saying that it’s a bad idea to buy individual stocks if and only if you have the time, knowledge, and desire to do it right. However, most Americans don’t.

Essentially, Buffett feels that an investment in an S&P 500 index fund is a bet on American business, which has historically been a very good one. Over the long run, the S&P 500 has generated total returns of about 10% annualized.

And since S&P 500 index funds generally have minimal fees, you get to keep the vast majority of the returns. In a nutshell, an S&P 500 index fund guarantees that you’ll do as well as the market over time, which has historically been quite good.

Good years and bad

To be clear, Buffett is a fan of S&P 500 index funds as a long-term investment. In other words, if you’ll need the money you’re investing within a few years, you’re better off looking elsewhere, such as a five-year CD or bonds.

The reason for this is that the S&P 500, just like individual stocks, can be quite volatile over shorter periods of time. Over the past 50 years, the index has gained 30% or more in nine separate years, but has also lost as much as 37% in a single year, even after factoring in dividends. However, over long periods of time — say, 20 years or more — the S&P 500 has never been a bad choice.

How much would $10,000 in 1980 be worth today?

To illustrate this, let’s say that you had invested $10,000 in a low-cost S&P 500 index fund in 1980. Since Jan. 1, 1980, the S&P 500 index has generated a total return of approximately 7,670% as of this writing. This translates to a 12.1% annualized rate of return.

Assuming an expense ratio of 0.1% on your index fund (you can find even lower costs now), this means that a $10,000 investment would have turned into just over $760,000 as of Feb. 1, 2020.

This is why Warren Buffett loves cheap index funds as an investment for the majority of Americans. Sure, you wouldn’t have beaten the market, but you would have been guaranteed to do just as well as the market. An S&P 500 index fund would have allowed any investor to turn $10,000 into more than three-quarters of a million dollars in less than four decades — with the bare minimum of effort and expense.

WORLDVIEW: Five companies make up 15% of the S&P 500 – is that a problem?

The S&P 500 is dominated by a small handful of big tech companies – Apple, Amazon, Alphabet, Facebook, and Microsoft now make up over 15% of the S&P 500’s market capitalisation, up from 13% last year. They have also accounted for more than a third of the S&P 500’s growth in the last twelve months.

The S&P 500 is dominated by a small handful of big tech companies – Apple, Amazon, Alphabet, Facebook, and Microsoft now make up over 15% of the S&P 500’s market capitalisation, up from 13% last year. They have also accounted for more than a third of the S&P 500’s growth in the last twelve months.

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