The S & P 500 is a market capitalization-weighted index of the 500 largest American publicly traded companies. It comprises approximately 80% of the entire U.S stock market. It depicts the performance of the stock market, as it reports the risks and returns of the largest companies which investors use as a yardstick for the overall market.
S&P stands for standard and poor which are the names of the two founding financial companies. S&P is one of the three major index providers, the other two are the Morgan Stanley Capital International (MSCI) and FTSE Russell. The S&P 500 makes use of a market capitalization weighting method, the market capitalization of a company is calculated by taking the current stock price and multiplying it by the company's outstanding shares.
The S&P is a list where stocks are added and deleted based on the changes of the rules, this happens once in a quarter. One way of being a part of the S&P is to be a big company, the S&P also requires that companies that desire to be included make a report of their positive earnings for it's most recent quarter, which is a plus to an aggregate profit over four previous quarters.
For newly listed companies to be considered for a spot they are expected to have traded for a year. As a company gets a spot in the index, it might not always meet the requirement that placed it there.
How S&P Works
It's important that one understands how the S&P 500 works.
The S&P 500 tracks the market capitalization of the companies in its index. Market capitalization is seen as the total value of all shares of stock a company has issued. The index is weighted by float-adjusted market capitalization. It primarily measures the shares which are available to the public. It does not count those which are held by control groups, other companies, or government agencies.
The elements of the S&P 500 are being chosen by a committee, a committee selects each of the index's 500 corporations based on certain merits which include liquidity, size, domicile, public float, financial viability, and industry. It rebalances the index quarterly, in March, June, September, and December.
Each of these primary criteria that have been listed has specific requirements that have to be met. For instance, in order to be added to the index, a company must meet the following liquidity-based size requirements;
- Market capitalization must be greater than or equal to US$8.2 billion.
- Annual dollar value traded to float-adjusted market capitalization is greater than 1.0.
- At least 50% of the corporation's stock must be available to the public.
- Minimum monthly trading volume of 250,000 shares in each of the six months leading up to the evaluation date.
- At least 50% of its fixed assets and revenues must be in the United States.
The composition of the S&P 500 industries reflects that of the economy.