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Standard and Poors 500 Index

Standard and Poors 500 Index

An Index consisting of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value weighted index (stock price times number of shares outstanding), with each stock's weight in the Index proportionate to its market value.

Some say, it’s a company that rates stocks and corporate and municipal bonds according to risk profiles and that produces and tracks the S&P indices. S&P also publishes a variety of financial and investment reports.

The S&P 500 is considered to be a benchmark of the overall stock market.

What is an Index?

The first and consequently most widely known index was created back on May 26, 1896 by Mr. Charles Dow. At that time the Dow index contained 12 of the largest public companies in the US. Today, the Dow Jones Industrial Average (DJIA) contains 30 of arguably the largest and most influential companies in the US and World economy. We will discuss the composition of the DJIA later in this tutorial.

The basic definition of an index is "a statistical measure of the changes in a portfolio of stocks representing a portion of the overall market".

Before the computer age, calculating the price of a stock market index had to be kept as simple as possible. The original DJIA was calculated by adding up the prices of the 12 companies and then dividing that number by 12. These calculations were actually more like an average than an index, but it served its purpose.

Today computers do most of the work and the indexes are much more accurate to the market. For example, many of the larger indexes now are based on the market capitalization of a company's stock rather than the stock price alone.

Each stock index is slightly different. They include different types and amounts of stock. Some are even calculated in a slightly different manner to portray a different statistical measure.

The Standard & Poors 500 Index

As we just mentioned, the main problem with the DJIA is that it only contains 30 companies. The S&P 500 attempts to fix that problem by including 500 companies. As a result the index includes over 2/3 (at time of writing) of US market capitalization. More and more, it is being considered to be the benchmark of the US stock markets. Furthermore when mutual funds state that they have outperformed the market they are usually referring to the S&P 500.

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Category:   Finance & Investing

Length:   3 pages (730 words)

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