The Standard & Poor's 500 index (US stock market)

The S&P 500 (Standard & Poor's 500) is one of several US stock market indexes. It is based on the market capitalisation of 500 large companies whose common stocks are listed on the NASDAQ or NYSE.

The constituents of the S&P 500 Index and the weightings assigned to them are determined by the Dow Jones S&P indices. The S&P 500 is different from other US stock indices such as the NASDAQ composite index or the Dow Jones Industrial Average because of its weighting method and the diversity of its components.

The S&P 500 is considered one of the main representations of the US stock market, and is therefore one of the most popular stock indexes among traders, positioning itself as a barometer of the US economy's health.

The S&P 500 was created by S&P Dow Jones Indices, which is majority-owned by S&P Global. In addition to maintaining the S&P 500, S&P Dow Jones Indices publishes many other indices, including the S&P MidCap 400, the Dow Jones Industrial Average, the S&P Composite 1500 and the S&P SmallCap 600.

Traditionally, the index is capitalisation-weighted: stocks with a higher market capitalisation will have a greater impact on the value of the index than companies with a smaller capitalisation. However, the index is now float-weighted. This means that Standard & Poor's calculates the market capitalisation of each company using only the number of shares that the company can list on the stock exchange, i.e. its free float.

The history of the S&P 500 index

The S&P 500 was originally known as a composite index when its first stock index was introduced in 1924. At first, it only tracked a few different stocks; however, in 1927, the index expanded to 90 stocks, before reaching its current total of 500 in 1958.

In 1860, Henry Poor founded Standard & Poor's, which provided financial analysis and information. In 1942, his original company, Poor's Publishing, merged with another company, Standard Statistics (which was originally called the Standard Statistics Bureau when it was established in 1907), and then the Standard and Poor's Corporation was born. The S&P 500 was created in its current form in 1958.

Today, the index is calculated and published in real time. Because it includes both value stocks and growth stocks, the S&P 500 is generally considered a good measure of the overall level of stock prices. In 1963, Standard & Poor's entered into an agreement with Ultronic Systems, which gave Ultronics control over the calculation of a number of indices, including the S&P 500 Stock composite index, 50 Stock Utility Index, 425 Stock Industrial Index, 25 Stock Rail Index, as well as the calculation and publication of 94 S&P sub-indices.

Criteria for inclusion in the S&P 500 index

The components of the S&P 500 Index are chosen by an internal committee. However, it is done differently than other indices, where criteria are often rule-based. When the committee considers whether a new company should be added to the index, it must satify criteria based on:

• Market capitalisation
• Liquidity
• Floating capital
• Domiciliation
• Sectorial classification
• Duration of public trading
• Financial viability
• Stock exchange quotation

The companies that are chosen to be included in the S&P 500 are representative of the various industries that contribute to the US economy. And they must meet certain liquidity requirements:

• Market capitalisation must be equal to or greater than US $5.4 billion.
• The annual dollar-value traded against the free float-adjusted market cap must be greater than 1.0.
• The company must have a minimum monthly trading volume of 250,000 shares for each of the 6 months preceding the valuation date.

The stocks must also be listed on the stock exchange, either on the NASDAQ (including the NASDAQ Capital Market, the NASDAQ Select Market or the NASDAQ Global Select Market) or on the NYSE (including the NYSE MKT or the NYSE Arca). Certain stocks cannot be included in the index, in particular:

• Limited partnerships
• Master-limited partnerships
• OTC Bulletin Board questions
• Closed end funds
• Exchange Traded Notes (ETNs)
• Exchange Traded funds (ETFs)
• Royalty trusts
• Preferred stock
• Tracking Stock
• Mutual funds
• Convertible bonds
• Investment funds
• ADSs (American Depository Receipts)
• ADRs (American Depository Shares)
• Equity warrants

The index doesn't just include US companies, it also has companies that were never incorporated in America, as well as those that were once incorporated in the US, but have now resurfaced outside the country.

Updating of the index

In order for the S&P 500 index to remain consistent over a longer period of time, adjustments are made to account for any company actions that could affect market capitalisation. This includes events such as dividend issues, share issues or any restructuring event such as a spin-off or a merger.

To remain representative of the US stock market, the stocks making up the S&P 500 are periodically changed, with some items removed and others added. All actions that affect the value of the index are adjusted using a divisor to prevent any change from happening solely due to a company's financial actions. The divisor adjustment takes place after the close of the day and after the closing value of the S&P 500 index has been calculated. The various actions that require an adjustment of the divider are:

• Share issues
• Share buybacks
• Special cash dividends
• Business changes
• Rights offers
• Splits
• Mergers

S&P 500 index - Data across 90 years

In recent years, we have seen average yearly earnings increase. Many factors, such as higher stock valuations and more frequent reliance on low interest rates and low liquidity, appear to be contributing to this. In some years, the yield is well above average. In 2020, the S&P 500 saw a 29% increase during the year. Those gains were brutally wiped out in a very short period of time, due to the historic Covid virus situation, resulting in sweeping shifts in stock valuations.

One of the easiest ways to try to directly invest in the S&P 500, or to understand your investment performance versus its benchmark, is to use a fund whose mission is to follow it. Probably the most popular is the SPDR S&P 500 ETF Trust (SPY). Over the past few years, this ETF has generated an average return of 10.5%. For a predominantly national investor, it often pays off to compare the performance of one's portfolio to this fund, and to consider whether it might not be better to just own it.

Passive investors mostly seek to follow indices like the S&P 500, finding it increasingly difficult to outperform the market. Active investors, like many hedge funds, on the other hand, aim to outperform the S&P 500.

Trading the S&P 500 with ETFs (exchange traded funds)

ETFs are an easy way to invest in a selection of stocks without having to buy each one individually. They can track a stock market index, like the FTSE 100, an asset class, like government bonds, a market segment, like bonds maturing in less than 10 years, a region or a sector. ETFs are called "passive" investments, or passive funds, in that they attempt to follow the performance of a stock market index or set of investments, unlike "active" funds which attempt to beat the index.

ETFs are also known as “open” rather than “closed” investments/funds. This means that when money is added into the fund, new shares (units) are created. When the money is withdrawn, the units are redeemed.

DEGIRO (a stock broker) offer access to ETF trading, here are a few popular ETFs for investing in the S&P 500 index:

• iShares Core S&P 500 ETF
• Vanguard S&P 500 ETF
• SPDR S&P 500 ETF Trust

How to trade S&P 500 CFDs

CFD trading allows you to bet on both the rise or fall of an index. The leverage of a contract for difference on the S&P 500 is 1:20, that means you only need to lock in a margin of 5% of the investment. For example, you can invest 2000 British pounds on the index with a stake (margin) of 100 pounds.

Leverage increases the risk of quickly losing your investment, so start with a free demo account to understand how CFDs work.

Here is a list of CFD brokers for trading the S&P 500:

The values in this table are indicative, they may have changed. Check with the brokers for current information.

The best brokers to trade indices