S&P 500 Explained
Have you ever heard someone say "the stock market is doing great" and wonder, "how can you measure all stocks?" The term, the stock market, in this sentence, usually refers to the S&P 500. The S&P 500 is an index that reflects the performance of the American economy. Beginning in March 1957, the S&P 500 has been an ever-changing collection of stocks that span across different sectors and industries in the stock market. The S&P 500, abbreviated for the Standard & Poor's 500 Index, is composed of 500 stocks from U.S. companies with large market capitalizations.
To fully comprehend how companies join the Standard & Poor's 500 Index, it is essential to know what market capitalization means. Market Capitalization, also known as market cap, is the total value of all shares of stocks issued by the company. To calculate market cap, you multiply the stock price by the number of shares of that company in the stock market. The two main factors to drive up market cap are when a company issues more stock to the public or the stock price increases.
The 500 stocks in this index vary across 11 different sectors with technology being the most represented sector at 20.8% and utilities being the least represented sector at 2.8%. The large-cap stocks in the S&P 500 all combine to 27 trillion dollars. Microsoft, Apple, and Amazon are the largest held, most represented stocks in the index. This means that these three companies' performance can change the price of the S&P 500 more than any other individual stock in the index.
You can invest in the S&P 500 by investing in an exchange-traded fund, like ticker symbol SPY and VOO. Currently, the S&P 500 is priced at $3,372.85, while SPY is priced at $336.84. SPY mirrors the performance of the S&P 500 and consists of the same stocks and the same sectors of the market. This allows for lower-cost investing, while still diversifying, investing in the U.S. economy, and receiving a 1.70% dividend per year.
The Standard & Poor's 500 Index is used to measure the performance of the U.S. economy. This index is diverse and takes the top American stocks in the 11 sectors involved to represent the performance of the different parts of the economy accurately. You can invest in ETFs that mirror the S&P 500 to diversify your portfolio and invest in relatively safe, large-cap American stocks. Over the past 20 years, the average rate of return of the Standard & Poor's 500 Index has been 5.9%. The S&P 500 is a great way to invest in the American economy and diversify your portfolio.