The Standard & Poor’s 500 Index (S&P 500) is an index of 500 stocks seen as a leading indicator of U.S. equities and a reflection of the performance of the large-cap universe, made up of companies selected by economists. The S&P 500 is a market value weighted index and one of the common benchmarks for the U.S. stock market; other S&P indexes include small-cap companies with market capitalization between $300 million and $2 billion, and an index of mid-cap companies. Investment products based on the S&P 500 include index funds and exchange-traded funds are available to investors. The index constituents and the constituent weights are updated and checked on regularly using rules published by S&P Dow Jones Indices. Although the index is called the S&P “500”, the index contains 505 stocks because it includes two share classes of stock from 5 of its component companies.
The S&P 500 is widely regarded as the most accurate gauge of the performance of large-cap American equities. While the S&P 500 focuses on the large-cap sector of the market; it is considered representative of the market because it includes a significant portion of the total value of the market. The 500 companies included in the S&P 500 are selected by the S&P Index Committee, a team of analysts and economists at Standard & Poor’s. These experts consider various factors when determining the 500 stocks that are included in the index, including market size, liquidity and industry grouping.
The S&P 500 has become a preferred index for U.S. stocks, unseating the Dow Jones Industrial Average (DJIA). The S&P 500 is perceived as more representative of the market because it is made of 500 companies, compared to the DJIA’s 30. There is also a major difference in how companies are represented in either index. The S&P 500 uses a market cap methodology, giving a higher weighting to larger companies, whereas the DJIA uses a price weighting methodology which gives more expensive stocks a higher weighting. The market cap ranking is also seen as more representative of real market structure.