All You Need To Know About S&P 500 Index

The Standard and Poor’s 500, or simply S&P 500, is popular in the US stock market. It is an index that tracks the performance of stocks of the top 500 large-cap public-listed companies. For stock market performance, S&P 500 serves as a reliable analytical tool. As a result, investors usually prefer investment in stocks under the index.

But there’s much more to the index than we make it out to be. And this article is going to help you understand what S&P 500 is. We have compiled a list of a few things you need to know S&P 500 Index.

Why it is called Standard & Poor’s

You know that S&P stands for Standard & Poor’s. But have you ever wondered where the name came from? Alright, here’s a quick history lesson. In 1860, an American financial analyst, Henry Varnum Poor, established a company called Poor’s Publishing. The company would publish a guide for investors in the railroad industry.

In 1906, the Standard Statistics Bureau was formed, which eventually was rechristened Standard Statistics Company. In 1923, it came up with its first stock market index. At that time, the said index only comprised stocks from 233 companies in the country.

Twenty years later, the company merged with Poor’s Publishing and formed what is now called Standard & Poor’s. And it was only in 1957 that the index started covering 500 companies, which resulted in renaming the index to the S&P 500 Stock Composite Index.

S&P 500 as a benchmark

Investors investing in stocks tracked in the S&P 500 index consider the index as a benchmark. They measure the performance of the portfolio against the general market. Based on the performance of the stocks on the index, analysts determine the market conditions and predict future market fluctuations.

But, the index may not be reasonably diverse

Diversification of the portfolio is a vital strategy in investment. And, S&P 500 being a benchmark, you might think it is a highly diverse index. But, it is not actually. As of 2022, the index features the most number of stocks of IT companies.

Following IT stocks are those in the healthcare sector. The third highest number of stocks belongs to the category of consumer discretionary. In fact, among the top 10 companies listed on the index, a majority of them belong to the IT sector.

How does the index work?

The workings are largely based on the market capitalization of the companies. Before we discuss further, let me tell you a bit about market capitalization. Now, market capitalization refers to the total value of all shares of a stock that a particular company has issued. It is calculated by multiplying the total number of these shares by the stock price.

To make it to the index, the larger a company’s market capitalization, the more representation it receives on the index. The adjusted market capitalization should be $13.1 billion, and the stock price must be a minimum of $1 per share.

Equally important are other factors. All companies listed on the index are in the United States, with 50 percent of their stock available to the public. Moreover, half of the total fixed assets and revenues of the company must be located in the country. Also, the company must report positive earnings in the previous four consecutive quarters.

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