What is the S&P 500? And why you should care

The S&P 500 is a stock market index that tracks the stocks of 500 large-cap( worth over $6bn each) U.S. companies. It represents the stock market's performance by reporting the risks and returns of the biggest companies. Over the last 10 years, it has returned 9.49 percent per year. In 2017, it returned 21.83 percent. S&P stands for Standard and Poor, the names of the two founding financial companies that merged.

How the S&P 500 Works🏗

The S&P 500 tracks the market capitalization♣️ of the companies in its index. Market cap is the total value of all shares of stock a company has issued. It's calculated by multiplying the number of shares issued by the stock price. A company that has a market cap of $100 billion receives 10 times the representation as a company whose market cap is $10 billion. The total market cap of the S&P 500 is $23.5 trillion.🏋️‍♀️ ⠀⠀
The index is weighted by a float-adjusted market cap🏌️‍♂️🏊‍♂️. This means It only measures the shares available to the public. It does not count those held by control groups, other companies, or government agencies

A committee selects each of the index's 500 corporations based on their liquidity, size, and industry. It rebalances(introduces new firms or removes some current firms from) the index quarterly, in March, June, September, and December. To qualify for the index, a company must be located in the United States and have a market cap of at least $6.1 billion and fulfill other factors set out by the committee including:

  • A market cap of at least $5.3 billion
  • Adequate liquidity
  • Trading activity of at least 250,000 shares every six months
  • A U.S. company with at least 50% of its assets and revenues being of American origin
  • Positive earnings for the past four quarters
  • At least 50% of shares owned by public investors

Why you should care about the S&P 500?🎯 ⠀

The S&P📌 is seen as the economic indicator in the united states as it captures 80% of the market cap of the entire US stock market. This means if the S&P loses value, investors will use this as a sign of worrying times for the US economy. They also use it to compare the performances of other financial instruments📍📉 such as mutual funds. This sentiment can easily be shifted to the UK Market due to the amount of US companies who operate in the UK or control a significant amount of UK assets and workforce.This means your livelihood can be affected by changes in the S&P 500, directly or indirectly.💡

The S&P includes companies from all sectors so it has a good coverage of businesses. In 2017, the 10 largest companies in the S&P 500 (with a weighted market cap) were Apple, Microsoft, Amazon, Berkshire Hathaway B, Facebook, JP Morgan Chase, Johnson & Johnson, Exxon Mobil, Alphabet C (formerly Google), and Alphabet A. Imagine if any of this firms were to suddenly start failing?

How do you make money with the S&P 500?🐥

You cannot invest directly in the S&P 500 although you can buy the stocks of the companies individually. The S&P 500 provides a cheaper and less intensive way to track the performance of the 500 firms it contains rather than buying 500 individual stocks which will cost you a lot in brokerage fees. To get access to the S & P500 you need to invest in an S & P 500 index fund that mimics the performance of the S&P.💡

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