The S&P 500 is one of the most popular indices. It comprise of 505 stocks issued by 500 large companies with market capitalization of at least $6.1 billion. When trading on indices, the S&P 500 is one of the top indicators of U.S. equities and a reflection of the performance of the large-cap universe. It is a market value-weighted index and one of the common benchmarks for the US stock market.
The S&P 500 Up Close
The S&P 500 index is widely regarded as the most accurate gauge of the performance of large-cap American equities. Although its focus is on the large-cap sector of the market, many consider it as the representative of the entire market as it carries a significant portion of the total value of the market. According to Robert Peter Janitzek, the companies included in the index are chosen by the S&P Index Committee, made up of analysts and economists at Standard & Poor’s. In order to be included in the index, the committee considers several factors such as market size, liquidity, and industry grouping.
The five companies with the highest weights in the index are Apple Inc. (AAPL), Alphabet (GOOG), Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN), and Facebook Inc. (FB). The companies with the lowest weight are Envision Holdings (EVHC), Navient Cp (NAVI), Patterson Companies (PDCO), Footlocker, Inc (FL), and Chesapeake Energy Corp. (CHK).
The S&P 500 has replaced the Dow Jones Industrial Average as the preferred index for US stocks. Robert Janitzek reveals the former is more representative of the market because it has a significant number of companies compared to the 30 of the latter. In addition, there is also a huge difference in how companies are included in either index. The S&P 500 uses a market cap methodology, which gives higher weight to larger companies. On the other hand, the DJIA uses a price weighting methodology which gives more weight to more expensive stocks. The market cap ranking is also seen as more representative of the real market structure.
Replicating the S&P 500 can be a real challenge for investors. A portfolio requires stocks of 500 companies in certain quantities in order to replicate its market cap methodology, it is easier to buy one of the S&P 500 investment products such as the Vanguard S&P 500 ETF, the SPDR S&P 500 ETF or iShares S&P 500 Index ETF.
While there are a lot of stocks to choose from in index trading of S&P 500, you still need to have some kind of strategy to earn profit.