What is the S&P 500? Definition and Meaning

The¬†S&P¬†500, also known as¬†the¬†Standard & Poor’s¬†500,¬†is a stock market index that includes the 500 largest companies (in terms of total market capitalization)¬†listed on the New York Stock Exchange or NASDAQ.

The companies listed on the S&P 500 are leaders in their industry.

S and P 500 image for article 40000The index is often considered to be the best representation of how the US stock market and overall economy is performing.

What makes the S&P 500 different from other market indices (such as the Dow Jones Industrial Average) is the diverse weighting methodology it uses.

The index was created and is operated by the S&P Dow Jones Indices Рa joint venture majority-owned by McGraw Hill Financial.

Standard & Poor’s started as a stock index in 1923. It emerged in its present S&P 500 form on March 4th, 1957. Thanks to current technology, the index is now disseminated in real time.

According to McGraw Hill Financial, “the index value is the quotient of the total float-adjusted market capitalization of the index‚Äôs constituents and its divisor.”

The S&P 500 is a member of the S&P Global 1200 family of indices.

How are companies selected?

Components of the index are chosen by a special committee that analyzes the following factors of a company: market capitalization, liquidity, domicile, public float, sector classification, financial viability, and treatment of initial public offerings (IPOs).

Criteria for eligibility:

  • Unadjusted market capitalization of at least US$4.6 billion or more.
  • The company is required to¬†trade a minimum of 250,000 shares in each of the six months before the evaluation date.
  • Public float of at least 50% of the stock.
  • Yearly earnings should be positive in addition to the company’s most recent quarter.
  • IPOs should be seasoned for 6 to 12 months.

Calculating a company’s rank

In order to properly evaluate a company’s index level the following S&P 500 formula is used:

S&P 500 formula

Where P is the price of each stock and Q is the number of shares publicly available.

The divisor value is approximately 8.9 billion Рalthough it adjusts according to market conditions.

Note:¬†This index formula is sometimes called a ‚Äúbase-weighted aggregative‚ÄĚ method.

Video explanation: