An introduction to the S&P 500

The S&P 500 is a stock market index that tracks the performance of the 500 (or so) largest companies in the US. It is a capitalisation-weighted index, meaning companies are selected for inclusion based on their total market value and given a weighting relative to their size – a $U50 billion company will have double the weighting of a $US25 billion company.

It was founded by financial services business and ratings agency Standard & Poor’s in 1957 to replace an earlier 90-stock index. Today it is owned by S&P Down Jones Indices, which publishes more than 130,000 indices across the world, including the Dow Jones Industrial Average, the S&P/ASX 200 in Australia and the S&P/TSX in Canada.

With a combined market cap of more than $US33.4 trillion, the S&P 500 represents around 80% of the US stock market, including many of the world’s largest companies such as Microsoft, Amazon and Apple. This allows it to serve as a fairly reliable proxy for both the US stock market and the wider economy. As with the DJIA, the conventional wisdom is that if the S&P 500 is performing well, then so is the US economy (and vice versa). For that reason, it is closely followed by traders and investors around the world.

The index is also used as a benchmark to gauge the performance of fund managers and investors – Warren Buffet measures Berkshire Hathaway’s performance to the S&P 500 in his annual newsletter each year, for instance – and as the basis for many exchange-traded funds. Overall, there is more than $US11 trillion benchmarked to the index.

The S&P 500 is re-calibrated on a quarterly basis, with the committee that oversees it adding or removing stocks from the index due to movements in share prices and other factors. As of June 2021, the top ten stocks accounted for more than 26% of the total market cap.

The top 10

• Apple
• Microsoft
• Amazon
• Facebook
• Alphabet (Google) Inc. Class A
• Alphabet Inc. Class C
• Berkshire Hathaway
• JP Morgan Chase and Co
• Tesla
• Johnson & Johnson

Unsurprisingly, information technology is the largest sector on the index, representing more than a quarter of its total market value, followed by healthcare at 13%, financials at 12% and communication services at 11%. 

These three indexes are quoted regularly in stock market news reports, both with the US and across the world, but how do they differ from each other and how much do those differences matter?

The Dow Jones is one of the oldest stock market indices in the world and predates the S&P 500 by several decades. It currently consists of 30, large blue-chip stocks that are considered representative of their industries and unlike the S&P 500, its composition rarely changes. It remains the most widely quoted index in the world, though many market watchers consider the S&P 500 to be the better barometer of the health of the stock market and the economy because of its broader composition.

The Nasdaq Composite includes all of the 3,300 or so stocks listed on the Nasdaq. It’s composition is heavily concentrated in the tech sector, which makes up more than 48% of the value of the index. It also includes a large number of speculative stocks, though as with the S&P 500, its performance is closely tied to a relatively small number of very large companies.

As we’ve said, the S&P 500 includes many of the world’s largest companies and counts many well know global companies among its constituents. These companies can be traded directly via our platform​.

For investors looking for a broad exposure to the US market, an exchange-traded fund​ may be an option. These are publicly listed investment instruments that track the performance of the S&P 500, ensuring investors receive roughly the same return as the index.

Investors and traders can also choose to trade S&P 500 futures contracts or CFDs (contracts for difference)​. This essentially involves betting on where the S&P 500 index will be at a particular point in the future, and investors do not take ownership of the underlying assets. These trades are normally carried out on margin – with traders putting forward a certain amount of capital and borrowing the rest from their broker, which increases the risk/reward proposition. This can also be done with individual companies like Apple and Facebook.

The S&P 500 is part of an exclusive club of indices that are used by investors and traders as proxies for the world’s largest stock markets – along with the FTSE 100, the Hang Seng, the Nikkei 225, the Nasdaq Composite and Dow Jones. It also serves as a benchmark for many US and global funds as well as the basis for investment instruments like exchange-traded funds.

For more information on how to trade stocks, visit our share trading​ page.