Standard & Poor's 500 Index

An indicator of US stock market performance, the Standard & Poor's 500 Index tracks the prices of 500 of the world's largest stocks (though foreign public corporations make up a miniscule part of the index). It is generally assumed that the index tracks the 500 largest companies (in terms of market capitalization), but this is not the case. The companies underlying the index are chosen by the Standard & Poor's corporation in an attempt to create a basket of stocks that is representative of the broad domestic market.

While the Dow Jones Industrial Average is probably the most quoted and widely known US stock market indicator, the S & P 500 is the one most used by investment professionals. It has many advantages over the Dow, which is only composed of only 30 stocks. Among these are the fact that the companies in the S & P 500 are weighted by market capitalization, not simply averaged like those in the Dow. This helps market watchers get a better feel of what happened to the actual money in the market over time, rather than the individual fortunes of a handful of companies. The S & P 500 is also broader in terms of the companies it represents--those in the Dow are huge companies as a rule, while most companies in the S & P 500 (and the market) are much smaller.

Standard & Poor's started its first index in 1923, but this was not expanded to 500 companies until March 4, 1957.

The S&P 500 is a value weighted stock index which tracks the relative values of 500 blue chip companies, as selected by the Standard and Poor's company. The companies are selected according to a number of criteria, including market capitalization, stock liquidity, and industry group representation. The "500" is an attempt to create an index that reflects the overall health of the US economy (and, as many of the listed companies are multi-national enterprises, the world economy).

While the 500 companies change on a fairly regular basis as they cease to adhere to the criteria for selection (thus rendering it fairly useless to list them here), there are ten primary industry groupings which remain constant, and from which stocks are picked. These sectors are part of the Global Industry Classification Standard (GICS). The GICS is further broken down into industry groups, industries, and sub-indistries, but that breakdown belongs on another node. The ten sectors are:

1. Consumer Discretionary
2. Consumer Staples
3. Energy
4. Financials
5. Health Care
6. Industrials
7. Information Technology
8. Materials
9. Telecommunication Services
10. Utilities

The S&P 500 Index has a very broad number of applications in the world of finance. For one thing, it is the most common measures of investment performance. Mutual fund managers who do not outperform the Index, if that is their chosen benchmark, on a risk-weighted basis, should not expect to keep their clientel very happy. The 500 also serves as one of the 10 indices in the Index of Leading Economic Indicators.

Perhaps most significantly, the Index can be invested in directly by individuals and institutions. This is widely regarded as one of the wisest forms of stock market investment, as it leaves the investor exposed only to fluctuations in the broad market as a whole and not to any one specific company or sector. Investment in the index can be accomplished by either investing in an Index Fund such as the Vanguard 500 Index Fund, or by buying a financial device known as a spider (so named for its ticker symbol on the AMEX, SPY).