When you hear people talk about the stock market, they often mention the S&P 500. To the beginning investor, this sounds like jargon that you don’t have to worry about unless you’re working on Wall Street or have all your money in a hedge fund.
This couldn’t be further from the truth.
Simply put, the S&P 500 (short for Standard & Poor’s 500) is a way to measure how America’s top businesses are currently performing. It’s one of the most popular stock market indexes — if not the most popular, giving investors a general idea how the American market is doing during a given period of time.
Best of all, understanding the S&P 500 could help you as an investor. Just learn these simple facts, and you’ll be on your way to making better investments before you know it.
The S&P 500 is a stock index.
An index measures a certain number of stocks (as opposed to every stock in existence) to gauge how well the market might be doing.
The S&P 500 index measures 505 stocks from 500 leading American companies.
If 500 of the biggest American companies are performing well on the stock market, then the American market is probably doing well, too. Also, the companies on this index have to be American owned, but don’t necessarily have to have headquarters in the U.S.
Standard and Poor regularly adds and removes companies from the S&P 500.
The companies on the S&P 500 aren’t the 500 biggest companies in existence. They’re on the index because they’re the most widely held stocks, they have the most liquidity (their stocks can be easily bought or sold without drastically affecting price), and they’re one of the leading companies in their industry.
The companies on the S&P 500 are all large cap companies with market capitalizations (or market caps) of over $10 billion.
A company’s market cap on the S&P is determined by their stock’s current share price multiplied by the free float (the number of shares held by investors). For instance, if the price of a share of Apple ($AAPL) stock is $116.63 and they have 5.39 billion floating shares, their market cap will be around $628.64 billion.
The value of the S&P 500 is generated through a weighted average of all 505 stocks’ prices.
Stocks on the S&P with a bigger market cap on will have a greater impact on the index than stocks with a lower market cap.
Basically, if a stock is on the S&P 500, they’re one of the biggest companies in their industry. They’re also likely generating billions of dollars in revenue each year.
If you want to invest in the S&P 500, you could invest in individual stocks on the index. Apple, Amazon, and Google are just three of the 500 companies on the index, and they’re some of the best performing companies in America.
You could also invest in index funds, like $SPY and $VOO. These stocks invest in all 505 stocks on the S&P 500. While this might sound expensive, SPY and VOO own the shares from each stock, but you (the investor) would simply own small percentages of each stock while paying one price (around $200) for a share of SPY and VOO. These index funds generally increase in value over time, and are less risky than buying a single company’s stock.
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