The S&P 500
The S&P 500 is an index comprised of the 500 largest publicly traded companies by market capitalization. Basically, the index contains the 500 most influential US publicly traded companies.
The S&P 500 is a market capitalization (also called Market Cap Index) Index, meaning that the companies that are disproportionately larger, giants such as Apple or Exxon, have the most influence over the index, and smaller companies like, for example, MAKO Surgical or First Solar, at the low end, have a much lower weight.
The S&P is usually used as a benchmark or a more accurate gauge of "how the market's doing" over an index like, for example, the Dow Jones Industrial Average, for the very same reason. The Dow Jones only comprises 30 components and it's a price-weighted index, so if a company has a higher share price, it'll have a disproportionate weighing on the index. The S&P is a market capitalization index, and that provides a more accurate picture of "what the market is doing on a day-to-day basis".
In fact, it's very important for mutual fund managers because their performance is usually compared to the S&P 500, so, if the S&P 500 as an index goes down 40% like it did in 2009, and a fund manager only goes down a 35%, in other words, if a fund manager only looses a third of the money he’s managing, instead of 40% of it, he gets a raise, because the performance is (almost) always related to the S&P 500.
The S&P 500 is commonly used as a benchmark to test a trader's performance and to see if YOU (the trader) are outperforming or underperforming the market. Many investors would be wise to use it in this way.
A bit of history about the S&P 500:
The S&P was created by Standard & Poor's (a very famous US financial services company) in 1957.
This company created the index in order to assess the overall American Stock Market, so, when you take the stock performance of those 500 companies drawn from very diverse industries as an aggregate, you say "that's about how the American stock market did”, so if last year the market went up 10% you'd say that on average those companies all went up 10%, and we use those companies as our benchmark.
Why should investors care about the S&P 500?
Investors should care about the S&P 500 because is the easiest, quickest way to measure the performance of the American Stock Market, you can use that measure to contrast with other stock markets, you can look at the FTSE 100 in London, to see how the British Stocks have done, or you can look at the Hang Seng Index in Hong Kong, and see how those companies have done.
You can take each market, look for that benchmark index and assess them all against each other. It is worth noting by the way, there are a couple other measures that people routinely use in the US, like the Dow Jones Industrial. It is believed that the 500 companies, more than the 30 that the Dow Jones are more accurate.
There is also the Wilshire 5,000 that, as its name indicates, is composed of 5,000 companies, including many small companies and some people believe that's a better assessment. That's arguable, both are very good indices, just like the Dow Jones.
What are the companies that make up the S&P 500?
Here are 25 most prominent companies that make up the S&P 500 by market capitalization order:
- Apple Inc. (AAPL)
- Microsoft Corporation (MSFT)
- Amazon.com Inc. (AMZN)
- Facebook Inc. Class A (FB)
- Berkshire Hathaway Inc. Class B (BRK.B)
- Johnson & Johnson (JNJ)
- PMorgan Chase & Co. (JPM)
- Exxon Mobil Corporation (XOM)
- Alphabet Inc. Class C (GOOG)
- Alphabet Inc. Class A (GOOGL)
- Bank of America Corporation (BAC)
- Wells Fargo & Company (WFC)
- Chevron Corporation (CVX)
- Procter & Gamble Company (PG)
- AT&T Inc. (T)
- Home Depot Inc. (HD)
- Pfizer Inc. (PFE)
- UnitedHealth Group Incorporated (UNH)
- Visa Inc. Class A (V)
- Verizon Communications Inc. (VZ)
- Citigroup Inc. (C)
- Intel Corporation (INTC)
- Cisco Systems Inc. (CSCO)
- Comcast Corporation Class A (CMCSA)
- Boeing Company (BA)
To see the complete list of companies that make up the S&P 500 please click here.