Understanding The S&P 500 Index

If you’re thinking about investing money in the stock market, you’re probably wondering where to start. It’s a fair question to ask, as many different types of investment opportunities are available to pick from these days, including everything from commercial real estate to indexes like the S&P 500. However, it’s not always apparent what companies receive your investment in the S&P 500. Let’s take a closer look at how the index works, various ways that it can help you grow your wealth, and how things stack up in terms other popular indexes like the NASDAQ 100.

What Is The S&P 500 Index? 

The S&P 500, or the Standard and Poor’s 500, is a stock market index in which you can invest that tracks the stock performance of 500 prominent American companies that are listed on the two major stock exchanges. Among today’s best-known stock indexes, what happens on the S&P 500 often serves as a barometer for what’s happening throughout the larger marketplace in general. 

It may help to note that the S&P is a weighted index, which effectively prioritizes companies by market capitalization – in other words, each company is not equally weighted on the index. Keep in mind that the index contains stock from all different sectors of the American economy as well.

The Weighting Formula For The S&P 500

Companies on the S&P 500 index are weighted by their respective market capitalizations, defined as their share price multiplied by the total number of their shares that are outstanding. In other words, a company’s overall valuation indicates how much influence it might expect to exert over the index’s general performance.

Rather than simply dividing the index’s total value by 500 to arrive at a firm’s weighing, you’ll find that companies in the S&P 500 are instead represented proportionately. In effect, all firms’ on the S&P index’s market caps are first added together, then divided by the company’s individual market cap (which hinges on its U.S. stock shares’ volume and pricing) to determine its index weighting.

What Companies Are In The S&P 500? 

You can expect to find many well-known blue-chip firms contained here, including corporate and Wall Street stalwarts such as Apple, Alphabet, Microsoft, JPMorgan Chase, Berkshire Hathaway and more. Of course, the list isn’t precisely one of the largest 500 firms in America as defined strictly by market cap alone, as participation in the index also hinges on other variables, such as the use of publicly traded shares. However, as one of the most broadly cited stock indexes in the U.S., the S&P 500 reflects the performance of some of the largest publicly traded companies in America. Keeping an eye on it may give you a general sense of how well a major corporation is competing with its rivals, and which way the general economy may be trending in a broad sense.

Comparing The S&P 500 Against Other Benchmarks 

Of course, the S&P 500 isn’t the only stock market index out there. Others such as The Dow Jones and NASDAQ 100 may include different publicly traded companies . If you’re an aspiring investor, it’s important to note that the performance of one stock index should not be confused with the performance of another.

S&P 500 Vs. The Dow Jones 

The Dow Jones is another commonly cited stock market benchmark that contains just 30 stocks (versus the S&P’s 500), and is typically seen as being more representative of the retail investor’s point of view. By way of contrast, institutional investors (e.g., banks and credit unions) tend to consider the S&P 500 as a more accurate representation of U.S. equity markets overall. Because of its approach to market cap weighting, the S&P 500 index also allocates a larger percentage of the index to companies with higher market caps. The Dow Jones instead operates on price-weighting and gives companies with higher stock prices higher weighting in the index.

S&P 500 Vs. NASDAQ

NASDAQ effectively serves as a marketplace where securities can be electronically traded on a global basis. Several stock indexes such as the S&P 500 may include the stocks of companies that are traded on NASDAQ (and its related indexes) as well. For instance, just a few different stock indexes that NASDAQ provides access to include the NASDAQ 100 Index (featuring 100 of today’s largest, most commonly traded stocks that are listed on the marketplace) and NASDAQ Global Equity Index (featuring international stocks).

Pros And Cons Of The S&P 500 Index

No two stock indexes are created equally. Nor is the S&P 500 necessarily weighted in similar fashion as other stock indexes to which you might compare it. Keeping this in mind, it’s important to note that there are several upsides and downsides to trading within the S&P 500 index.

How To Invest In The S&P 500 Index

Keep in mind that there’s no specific “stock” for an index. Rather, if you’re looking to reach your financial goals by investing in the S&P 500, you’ll need to buy an index mutual fund or electronically traded fund (ETF). Doing so provides a means through which to purchase a number of different stocks in one fell swoop that’s reflective of the underlying index.

In simple terms: If you buy a fund that bases itself on the S&P 500, you’ll effectively be purchasing the group of stocks in bulk. Of course, in order to purchase an ETF or index mutual fund, you’ll need to first sign up for a brokerage account through which to make these trades and transactions.

Average Returns For The S&P 500

The average return from investing in the S&P 500 has hovered around 10% for the last 10 years. That’s a pretty tidy sum to collect on your investments and equates to strong dividends and annual return performance. However, you should keep in mind that returns (and specific return amounts) are never guaranteed, regardless of a stock index’s past performance. Be sure to do your research and homework, and speak with a qualified investment advisor before making any investments.

S&P 500 FAQs

Odds are, you probably have some more questions about the S&P 500 index. Answers to several of the most common can be found below.

What is the purpose of the S&P 500?

The S&P 500 is a stock market index that tracks the performance of 500 top publicly traded U.S. firms. Weighted based on market capitalization, it features companies from across 11 major economic sectors. Keeping an eye on it can offer a sense of the general health of the American stock market. In addition, many investors look to invest funds across companies contained within the S&P 500 as a way to diversify their holdings and earn strong returns.

Is the S&P 500 only US stocks?

The short answer is yes. The S&P 500 index features 500 of today’s leading publicly traded U.S. companies. Other index funds feature international stocks.

The Bottom Line: The S&P 500 Is An Opportunity For New Investors To Learn

Investing in the S&P 500, which is one of the most commonly watched and cited index funds in America, can prove a helpful way to build your investment holdings and grow your wealth. Many investors look to put funds into S&P 500 companies as a means through which to increase their earnings and diversify their assets across a range of firms in different industries and areas.

Need help monitoring your investments and understanding more about where your money is going? Be sure to download the Rocket Money℠ app, which can help provide visibility into your investment accounts.