The S&P 500 is a stock market index of 500 of the largest companies in the U.S. It’s one of the most well-regarded U.S. stock indices, and many use its performance to measure U.S. stock market performance overall.
While you can’t invest directly in the S&P 500, you could put your money into an exchange-traded fund or index fund that tracks this index. Let’s take a closer look at what the S&P 500 is and its performance over the past decade.
What is the S&P 500?
The Standard and Poor’s 500 index, more commonly known as the S&P 500, measures the performance of 500 of the largest publicly traded U.S. companies. It’s maintained by the S&P Dow Jones Indices. It includes companies across 11 sectors, including information technology, health care, and real estate.
To measure these companies’ performance, the S&P 500 tracks their market capitalization, or the total value of their outstanding shares. A company’s market cap is determined by multiplying its stock price by the number of shares it has.
Each company in the S&P 500 is weighted by its individual market cap as compared to the index’s total market cap. With this methodology, larger companies, such as Apple, Microsoft, and Amazon, carry a larger weight than smaller companies, such as Ralph Lauren or Alaska Air.
As a company’s share prices fluctuate throughout the day, the value of the index can change as well. The list of companies in the S&P 500 is also reviewed on a quarterly basis, and companies can be added or taken off the index as they gain (or lose) eligibility.
What companies are included in the S&P 500?
To be eligible for inclusion in the S&P 500, companies must meet a number of criteria. These include:
- Having a minimum market capitalization of $14.6 billion.
- Being highly liquid.
- Being a U.S.-based corporation that offers common stock.
- Being listed on an eligible U.S. stock exchange (the New York Stock Exchange or Nasdaq).
- Reporting positive earnings for the past four quarters.
In addition to large, stable corporations, real estate investment trusts (REITs) are eligible to be included in the S&P 500.
As of June 3, 2022, the following are the most heavily weighted companies in the S&P 500, starting with largest market cap:
- Apple Inc.
- Microsoft Corp.
- Amazon.com Inc.
- Alphabet Inc A.
- Tesla, Inc.
- Alphabet Inc C.
- Berkshire Hathaway B.
- Johnson & Johnson.
- Unitedhealth Group Inc.
- Nvidia Corp.
Some companies actually appear more than once in the index because they offer multiple classes of stock. For example, Alphabet actually appears twice because it offers Class A and Class C stocks.
S&P 500 performance
The S&P 500 has historically generated an average annual return of nearly 11% since its inception in 1957 (including dividends).
This chart with data from macrotrends.net gives a detailed look at this index’s performance back to 2008. While many years saw an impressive return, there are also years where the index dropped significantly. If you choose to invest in a product that tracks the S&P 500, it’s best to prepare for some volatility.
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S&P 500 vs. other indices
While the S&P 500 is one of the most highly regarded stock benchmarks, it’s not the only one. Here’s how it compares to the Dow Jones Industrial Average (DJIA) and Nasdaq.
Dow Jones Industrial Average
The DJIA is another leading stock market index that contains large and established companies in the U.S. While the S&P 500 includes 500 companies, the Dow only contains 30.
Instead of weighting companies by market cap like the S&P 500 does, the Dow weights companies based on their share price. Companies with the highest stock prices carry the most weight in this index.
Nasdaq could refer to two different things — a stock index or the National Association of Securities Dealers Automated Quotations, which is an electronic system for buying and selling stocks.
Nasdaq stock market indices include the Nasdaq 100 Index and the Nasdaq Composite Index. The first includes 100 large domestic and international non-financial companies, while the second includes more than 3,000 stocks.
The Nasdaq indices contain all of the companies that trade on the Nasdaq stock exchange. Because most of these companies are tech-related, the Nasdaq is often seen as a barometer for the performance of the tech sector.
However, it contains companies in other industries as well, including the financial, consumer, biotech, and industrial sectors.
How to invest in the S&P 500 index
As a stock market index that measures the performance of 500 companies in the U.S. stock exchange, the S&P 500 is not something you can invest in directly. However, you could invest in exchange-traded funds (ETFs) or mutual funds that track the index and mimic its performance.
Alternatively, you could buy stock in individual S&P 500 companies such as Apple and Microsoft.
Investor Warren Buffet has famously recommended that the average person should invest in an S&P 500 index fund over a long period of time. By investing for the long term, you may be able to weather the yearly fluctuations in the market and come out with a positive net return on your investment overall.
You could invest in an S&P 500-tracking fund for a low cost with a company such as Vanguard, Fidelity, or Schwab. For example, Vanguard’s S&P 500 ETF (VOO) tracks the investment performance of the S&P 500. It holds all the same stocks in the same capitalization as the index, and its performance since inception is very similar to the S&P 500’s.
As mentioned, however, the S&P 500 is not the only index out there. And if you have some experience with investing, you may choose instead to cherry-pick individual stocks and other investments.
Is the S&P 500 a good investment?
You can’t directly invest in the S&P 500. You could invest in ETFs and index funds that track the index, however.
Historically, the S&P 500 has had average returns of 10.7% since it began. This ROI fluctuates from year to year. In 2008 during the Great Recession, the S&P 500 was down by 38.5% at the end of the year, according to macrotrends.net. In 2019, it was up by nearly 29%.
Allowing your investments to stay in the market for a long period of time could help you weather the ups and downs in the market and come out on top. But as with any investment, there’s always some element of risk.
What does the S&P 500 measure?
The S&P 500 measures the performance of 500 of the largest, most well-established companies in the U.S., including Apple, Tesla, and Johnson & Johnson.
Its companies represent 11 sectors, such as technology, healthcare, and real estate. Because the S&P 500 only includes large corporations, its performance could be considered an indicator of the health of the stock market and overall U.S. economy.
What is the purpose of the S&P 500?
The S&P 500 is meant to track the U.S. stock market. Along with measuring the health of the equity market overall, it offers a stock market index that investors can track. Individuals can’t invest in the S&P 500 directly, but they could buy stock in its constituent companies or invest in an index fund or other fund that tracks the performance of the S&P 500.
Figuring out how to invest money in the stock market could feel daunting, especially if you’re a beginner. Diversifying your investments by opting for a fund that tracks a major stock market index, such as the S&P 500, could help mitigate risk.
The performance of the S&P 500 has gone up and down over the years, with some years ending in a loss and others showing a gain. On average, however, the S&P 500 has delivered a solid return on investment since its inception more than 60 years ago.
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