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What Is the S&P 500?

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What Is the S&P 500?
New York Financial District (Photo:Spencer Platt/Getty Images)
Definition: The S&P 500 is short for the Standard and Poor 500. It is a stock market index that seeks to represent the whole stock market. It tracks the 500 most widely held stocks on the NYSE. By tracking 500 stocks, it seeks to reflect the risk and return of all large cap companies. However, it also is used as a proxy for all of the total stock market.

It does this by tracking the market capitalization of these companies. Market capitalization is the total value of all the shares of stock the company has issued. The total market cap of the S&P 500 was $10.7 trillion.

The S&P 500 also seeks to make sure the industry sectors in the S&P 500 represent the industries in the economy. The sector percentages in the S&P 500 in 2010 were: Information Technology (17.8%), Financial (15.1%), Energy (12.7%), Industrials (11.3%), Consumer Staples (10.6%), Consumer Discretionary (10.6%), Materials (3.7%), Utilities (3.4%), Telecom Services (3.1%). (Source: S&P 500 Factsheet)

The S&P 500, like any measurement of the stock market, is often used as an economic indicator of how well the US economy is doing. If investors are confident in the economy, they will buy stocks. Some experts believe the stock market can often predict by about six months what the savviest investors think the economy will be doing.

To be included in the S&P 500, a company must meet the following minimum criteria:

  • Be a U.S. company.
  • Have a market cap of at least $4 billion.
  • At least 50% of its stock must be held by the public.
  • Four consecutive quarters of positive earnings.
  • A stock price of at least $1 per share.
  • Contribute to the overall balance of sectors within the S&P 500, to help it represent the overall market sector make-up.
  • Be listed on either the New York Stock Exchange or the NASDAQ. Real Estate Investment Trusts (REITs) and business development companies can also be included.
The top 10 largest companies in the S&P 500 in 2011 were: Exxon Mobil, Apple, IBM, Chevron, General Electric, Microsoft, AT&T, Johnson & Johnson, Procter & Gamble and Pfizer. The market cap of these 10 companies represent 20% of the market cap of the total S&P 500.

How Is the S&P 500 Different from Other Stock Market Indices?

The S&P 500 is widely viewed as having less large cap stocks than the Dow Jones Industrial Average. This index tracks the share price of 30 companies which best represent their industries. The market capitalization of the DJIA stocks account for nearly one quarter of the total U.S. stock market. The Dow is the most quoted market indicator in the world.

The S&P 500 also has less technology related stocks than the NASDAQ.

However, all of these stock indices move pretty close together, so if you focus on one, you will understand how well the stock market is doing. In other words, you don't really have to follow all three.

In addition to following the S&P 500, you should also follow the bond market. Generally, when stock prices go up, bond prices go down. However, there are many different types of bonds, including Treasury Bonds, corporate bonds, and municipal bonds. Bonds also provide some of the liquidity that keeps the U.S. economy lubricated. Their most important effect is on mortgage interest rates. To help you do this, Standard & Poor's, the company that created the S&P 500, also rates bonds.

Since the S&P 500 only measures U.S. stocks, you should also keep an eye on foreign markets, especially those following emerging markets like China and Brazil. It's also good to keep 10% of your investments in commodities, like gold.

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