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What is the S&P 500 and How Does It Work?

moving average, ma S&P 500

There are three major U.S. equities markets investors track on a daily basis and one of the largest is the Standard and Poor 500, but exactly what is the S&P 500 and how does it work?

For starters, the Standard and Poor moniker comes from the two companies that founded the index back in 1957.

Each of the three major indexes track stocks based on different criteria and as one of the biggest indexes, investors often use the S&P 500 as a benchmark of the overall market and the U.S. economy in general.

There is nearly $10 trillion indexed or benchmarked in the S&P 500, with indexed assets comprising nearly $3.4 trillion of that overall total.

The index covers nearly 80% of available market capitalization.

What Is the S&P 500?

Put simply, the S&P 500 tracks large-cap companies in the U.S. It assesses companies by market capitalization — the value of all shares of stock a company has issued.

That’s why it is considered to be one of the best benchmarks for the American stock market as well as the U.S. economy.

In addition to being a large-cap stock, companies have to meet additional criteria to be added to it.

But not all large-cap companies are listed on the S&P 500. Here are the top 10 companies on the index, as of Feb. 14, 2020:

  1. Microsoft Corp. (Nasdaq: MSFT).
  2. Apple Inc. (Nasdaq: AAPL).
  3. Amazon.com Inc. (Nasdaq: AMZN).
  4. Alphabet Inc. (Nasdaq: GOOG).
  5. Facebook Inc. (Nasdaq: FB).
  6. Berkshire Hathaway (NYSE: BRK.B).
  7. Visa Inc. (NYSE: V).
  8. JPMorgan & Chase Co. (NYSE: JPM).
  9. Johnson & Johnson (NYSE: JNJ).
  10. Walmart Inc. (NYSE: WMT).

For a complete list of the companies listed, click here.

How the S&P 500 Is Different From Other Indices

While stocks in the S&P 500 have to be listed on other major indices, like the New York Stock Exchange or the Nasdaq, there are some differences between the three.

For one, it does have more large-cap stocks than the Dow Jones Industrial Average. The Dow only carries 30 stocks compared to the 500. The Dow also weights its listings on price. The S&P 500 is based on market capitalization.

The Dow doesn’t have transportation or utilities as part of its listing, but the S&P 500 has included utilities on its list.

Another difference is what stocks are held in each index.

In the Nasdaq, nearly 53% of the companies listed are technology-related, compared to just 22% for the S&P 500.

Even though there are differences, all three indexes tend to have the same price fluctuations. That’s good for investors as it means you don’t have to watch all three of them to gain a bigger market picture.

Milestones for the S&P 500

Despite only starting on Jan. 3, 1950, the index has had its share of ups and downs.

As with any index, it has experienced the highs and the lows of the market. Here are a few of those milestones:

Making Money With the S&P 500

Remember, the S&P 500 is an index, not stock. That means you can’t directly invest in it.

But there are ways you can make money. One big way would be to invest in exchange-traded funds that track the index and there are three: the Vanguard S&P 500 ETF (NYSEARCA: VOO), the iShares Core S&P 500 ETF (NYSEARCA: IVV) and the SPDR S&P 500 ETF (NYSEARCA: SPY).

You can also invest in companies listed in the index but as always, do your homework first.

Coming soon to Money and Markets: Which S&P 500 ETF is the best investment.


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