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:
- Consumer Discretionary
- Consumer Staples
- Health Care
- Information Technology
- Telecommunication Services
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).