S&P 500 Index

Definition

The term S&P 500 Index refers to a common stock index first created back in 1923 by Standard and Poor's, a company that provides financial services.  The S&P 500 is one of several indices believed to be an indicator of the general health of the stock market.

Explanation

The S&P 500 Index is a composite, or portfolio, of five hundred common stocks believed to be representative of the entire stock market.  It's represented by several stock tickers, including GSPC, INX and SPX.

The index consists of large companies, as measured by market capitalization, and includes both dividend-paying securities as well as growth stocks.  At the time of inclusion, the market capitalization of these securities needs to be more than $5.3 billion.  Selection is made by a committee and companies are placed in the index based on their market capitalization, liquidity, industry sector, financial health, trading volume, as well as the length of time the security has been publicly-traded.  Securities included in the S&P 500 can be traded on either the NYSE or NASDAQ.

At one time, the index was calculated using market capitalization, which means that stocks with higher market capitalization values had a larger impact on the movement of the index.  Today, the index is float weighted, which means only the shares available for public trading are included in the market capitalization calculation.

A divisor is used to maintain the stability of the index. The divisor adjusts the index for financial actions such as the issuing of new shares, repurchases of shares, special dividends, and mergers.  The value of the index is updated every 15 seconds during the trading day.  Investors that wish to buy the S&P 500 Index have the option of purchasing shares of a mutual fund like the Vanguard 500.  Exchange traded funds, such as SPDR S&P 500 ETF (SPY) also provide investors with an opportunity to purchase this index.  Finally, futures contracts for the S&P 500 Index are traded on the Chicago Mercantile Exchange (CME).

Related Terms

buying the index, NASDAQ 100 Index, NASDAQ Capital Market Composite, NASDAQ Financial-100 Index, NASDAQ Computer Index, NASDAQ Composite