Investing Basics: The S&P 500

This blog was supposed to be about the basics so let’s get back to that for a change. The S&P 500 is the benchmark index against which many, if not most investments are compared. A common misconception, even amongst financial professionals (I’ve heard some talk about it), is that the S&P 500 is composed of the 500 “largest” or 500 “top” companies in the United States.  That is just not true.

Standard and Poor calls the S&P 500 a “gauge of the large cap U.S. equities market”. That is what it is designed to be. However the selection is not an objective rule based selection. It is selected by a committee based on what they think represents the US economy. The S&P 500 can contain a few non-US companies (currently 5) and it can also contain mid-cap companies. The index is float weighted (float = number of shares available for public trading). The index used to be market cap weighted so larger companies have would a higher influence on the Index values. That still kind of applies to float weighting too but not as heavily as it did with the market cap weight because in general (very high share prices cause problems with float because those stocks are not commonly traded) larger companies will have larger float.

If you would like to invest in the S&P 500 companies, almost every mutual fund company has a  fund that tracks the S&P 500 and you can also buy an ETF (Exchange Traded Fund, basically a fund that trades like a stock) such as SPY to track the index.

1 thought on “Investing Basics: The S&P 500

  1. Anonymous says:

    Thanks for this info. Sometimes it can be a little confusing with all the different markets.

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