What is S&P 500?

In one of our previous blogs, we have discussed the major global indices. We mentioned that the S&P 500 is the largest stock index in the world in terms of market cap. In this article, we will discuss more of the S&P 500. How is it calculated, the companies that are part of the index, and how can you invest in it? Let us get started.

What is the S&P 500 Index?

The S&P 500 (Standard and Poor) is a stock market index that measures and keeps track of the performance of the top 500 companies in the United States. These 500 companies are from 11 sectors that offer diversification and give a picture of the US economy. A company needs to meet multiple criteria to get included in the index. The important is that the company must:

• Be based in the US.
• Be listed on the US stock exchanges.
• Have a market cap of at least $15.8 billion.
• Be structured as a corporation and offer common stock.

How is the S&P 500 index calculated?

The S&P 500 uses a market-cap weighting method for index calculation. Let us understand this method first. Imagine a small bookstore with three popular books:

• Book A: 1000 units sold at Rs 10 each (Market Cap: Rs 10,000)
• Book B: 500 units sold at Rs 20 each (Market Cap: Rs 10,000)
• Book C: 200 units sold at Rs 50 each (Market Cap: Rs 10,000)

In this simple example, all books have the same market capitalization of Rs 10,000.

If we were to create a book index weighted by market cap, each book would have an equal weight of 33.33% in the index.

A 10% price increase in book C would have a larger impact on the index than a 10% price increase in book A because book C has a higher price per unit. In the real world, stock market indices like the S&P 500 use this method to determine the weight of each company in the index. The formula used by them is as follows:

Company Weighting in S & P= Company market cap / Total of all market caps

The total market cap is determined by adding the market cap of all the companies. A company's market cap is calculated by taking the current stock price and multiplying it with the company's outstanding shares.

Why is the S&P 500 important?

Here are a few reasons why the S&P 500 holds a special place in global market indices:

• Broad Market Representation: As mentioned earlier, it includes 500 large-cap companies across various sectors. Therefore, it provides a comprehensive overview of the US economy.  
• Benchmark for Investors: Many investors use the S&P 500 as a benchmark to measure the performance of their portfolios.  
• Economic Indicator: The index's performance can signal overall economic health and investor sentiment. 
• Basis for Derivatives: Numerous financial products, such as index funds and options, are based on the S&P 500.  
• Global Influence: Its performance impacts global markets as it is widely followed by investors worldwide.

List of S&P 500 companies

You will see all the popular and the biggest companies in the index. Obviously, we are not going to name all the 500 companies, but to give you some idea of the companies, here are the top 20 companies and their percentage allocation in the index:

Why is it called the Standard and Poor's Index?

You won't be able to make a guess for sure. The very first S&P Index made its debut way back in 1923 (more than a century ago!), a collaboration between the Standard Statistical Bureau and Poor's Publishing. Back then, it started with just 233 companies! These two brilliant minds joined forces in 1941 to create the legendary Standard and Poor's we know today.

How can you invest in the S&P 500?

You can buy the S&P 500 or any other index by investing in the corresponding index fund or Exchange Trade Fund (ETF). For example, you can invest in NIFTY50, you can invest in Kotak NIFTY ETF, or buy index funds like ICICI Prudential Nifty 50 Index.

To invest in the S&P500 from India is not straightforward as the index is originally from the US. Some platforms do allow investment in the S&P 500 index. You may explore those options.

Alternatively, you can invest in the index through the Motilal Oswal S&P 500 Index fund with your Demat account. It offers a direct way to invest in the top 500 US companies. It is traded on the NSE and BSE, making it accessible to everyone. You can find the fund on ICICI Direct.

Shortcoming of S&P 500 index

The index is a good indicator of the overall market, but it is not a perfect representation of the whole US stock market. Because it is based on market capitalization, larger companies have a bigger say (top 10 companies have one-third allocation). It means some industries or companies might get more weight than others. Plus, it only includes US companies, so it overlooks businesses based outside the country.

Before you go

The S&P 500 is the largest and most used index in the world. These 500 companies represent the most liquid and largest companies in the USA across sectors like banking, software, technology, manufacturing, and more.