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What Is the S&P 500?

The S&P 500 is a stock market index that is viewed as a measure of how well the stock market is performing overall. It includes around 500 of the largest U.S. companies.
July 20, 2020
Investing, Investments, Personal Finance
What Is the S&P 500?
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The S&P 500 is a stock market index that measures the performance of about 500 companies in the U.S. It includes companies across 11 sectors to offer a picture of the health of the U.S. stock market and the broader economy.

What companies are included in the S&P 500?

To be eligible for the index, companies must meet certain criteria. Among other things, companies must:

  • Have a market capitalization — which refers to the total value of the company’s outstanding shares — of at least $8.2 billion.
  • Be based in the U.S.
  • Be structured as a corporation and offer common stock.
  • Be listed on an eligible U.S. exchange. (Real estate investment trusts, known as REITs, are eligible for inclusion.)
  • Have positive as-reported earnings over the most recent quarter, in addition to over the four most recent quarters added together.

Thanks to this criteria, only the country’s largest, most stable corporations can be included in the S&P 500. The list is reviewed and updated quarterly.

The S&P 500 index today

The chart below shows how the S&P 500 has performed since 1990, up to the previous close of the current year. This demonstrates how the index has increased over the long term, despite some decreases year-to-year during the period.

Stock market data may be delayed up to 20 minutes, and is intended solely for informational purposes, not for trading purposes. 

What does the S&P 500 measure?

The S&P 500 tracks the market capitalization of the roughly 500 companies included in the index, measuring the value of the stock of those companies.

Market cap is calculated by multiplying the number of stock shares a company has outstanding by its current stock price. So, if a company has 2 million shares currently held by shareholders, and the current share price is $5, then the company’s market cap is $10 million. In simpler terms, the company has a value of $10 million.

The S&P 500’s value is calculated based on the market cap of each company, adjusted to consider only the number of shares that are traded publicly. If we add up the market caps of all the companies in the index, we could say the S&P 500 is worth about $24.47 trillion as of February 2020.

However, each company in the S&P 500 is given a specific weighting, obtained by dividing the company’s individual market cap by the S&P 500’s total market cap. Thus, companies with larger market caps are weighted more heavily than those with smaller market caps. Here’s a look at the 10 highest-weighted stocks currently in the S&P 500:

  1. Apple Inc. 
  2. Microsoft Corporation 
  3. Amazon.com Inc.
  4. Facebook Inc. Class A
  5. Alphabet Inc. Class A
  6. Alphabet Inc. Class C
  7. Johnson & Johnson
  8. Berkshire Hathaway Inc. Class B
  9. Visa Inc. Class A
  10. Procter & Gamble Company

List current as of July 20, 2020

Why assign the weightings? To give as accurate a picture of the stock market’s health as possible.

That’s important because when Microsoft’s stock rallies (or falls) 10%, that could mean a gain or loss of hundreds of billions of dollars. Compare this to clothing retailer The Gap, currently located near the bottom of the list. If its stock rallies or loses 10%, it could mean a gain or loss of a couple hundred million dollars. In this scenario, Microsoft’s price movements illustrate a much larger disruption to the economy than those of The Gap.

To arrive at the number we’re accustomed to seeing on the S&P 500 ticker, the index’s total market cap is divided by a proprietary divisor. As the share prices of S&P 500 companies move throughout the day, each movement has an impact on the value of the index, though companies near the top of the list have a substantially larger impact than those near the bottom.

Can you buy S&P 500 stock?

The S&P 500 isn’t a company itself, but rather a list of companies — otherwise known as an index. So while you can’t buy S&P 500 stock, you can buy shares in an index that tracks the S&P 500.

In fact, this is one of the best ways for beginner investors to get their feet wet in the stock market. Here are some of the most popular index funds that track the S&P 500:

  • Vanguard 500 Index Investor Shares (VFINX)
  • Fidelity 500 Index Fund (FXAIX)
  • Schwab S&P 500 Index Fund (SWPPX)
  • T. Rowe Price Equity Index 500 Fund (PREIX)

To get started, you’ll need to set up an online brokerage account. If you don’t already have one, see NerdWallet’s list of the best online brokerages for mutual funds to find an account that’s a good fit.

What is the average return of the S&P 500?

For nearly the last century, the average annual total return of the S&P 500 (which includes dividends) has been about 10%, not adjusting for inflation. However, keep in mind this doesn’t mean you can expect to get a 10% return on your investment in an S&P 500 index fund every year.

In 2008, for example, the S&P 500 finished the year down a staggering 37%. The following year, it finished up 26%. Earning a 10% average annual total return requires a long-term investing mindset and a willingness to ride out market volatility. Learn more about average stock market returns here.

What’s the difference between the Dow Jones Industrial Average and the S&P 500?

The DJIA, or simply the Dow, is another stock market index that includes large, established companies. However, there are a few key differences.

  • The Dow consists of only 30 companies, each of which is considered a leader in its respective industry.
  • The Dow is weighted based on the share price of each company, not the market cap, which means companies with higher share prices are given greater weight. The index is calculated by adding up the share prices of all 30 companies, adjusting for weight, and then dividing by a predetermined constant, called the Dow Divisor.
  • The Dow represents nine sectors, compared with the 11 found in the S&P 500.

Both the S&P 500 and the Dow include companies that are regarded as the country’s healthiest corporations. If you’re interested in purchasing stock from any of these companies (as opposed to shares of index funds), explore our guide on how to buy stocks to get started.

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