When you start out on a journey to understand the stock markets of the world, the first big thing that you realise is that different countries have different exchanges where stocks are traded. This can make it difficult to keep track of movements and trends. Although the NYSE or Nasdaq may react to macro-developments in a similar fashion and waves of activity will sweep across the markets of the world as they open and close in different time zones, it can be hard to stay on top of wider industry sector changes.
That’s where various index measurements come into play, and one of the highest profile indices is the S&P 500, which is now acknowledged as one of the top stock market benchmarks in the world.
Standard & Poor’s
S&P is an acronym for Standard & Poor’s, which is an American financial services company operating in 28 countries around the world. With a history that goes back over 150 years, S&P is now one of the Big Three credit-rating agencies alongside Fitch Ratings and Moody’s Investors Service. As well as the US-based S&P 500, the company publishes financial analysis on stocks, bonds and commodities trading in other countries and now publishes the Canadian S&P/TSX and the Australian S&P/ASX 200.
Standard & Poor’s introduced their first index of equities in 1923, and the S&P 500 as it is known today arrived in 1957. Encapsulating the 500 largest publicly-traded US companies listed on the NYSE or Nasdaq based on market capitalisation, the index gives details about company growth as well as the value of shares.
The components of the S&P 500 index and their weights are worked out by S&P Dow Jones Indices. The methodology used sets it apart from other indices, such as the Dow Jones Industrial Average or the Nasdaq Composite index. Today, it is one of the most popular US equity indices and noted as a bellwether for the overall US economy.
What sets the S&P 500 apart?
The S&P 500 essentially sets out to provide a snapshot overview of the stock market and the wider economy. Its name derives from the fact it measures the 500 largest corporations by market capitalisation listed on the New York Stock Exchange or Nasdaq Composite.
The index is possibly the most popular measure that is used today by both financial sector media and analysts as well as professional traders and fund managers. Only the Dow Jones Industrial Average, which is probably more widely known outside of the industry, is likely to have a similar reach and influence.
Calculating the index
The calculations for the index results are made by first taking the sum of the adjusted market capitalisation of all S&P 500 stocks. This figure is then divided by a proprietary figure developed by Standard & Poor’s called an index divisor.
Most independent sources cite the index divisor as being pegged at 8.9 billion. The divisor is changed to reflect stock splits, special dividends or spin-offs that might affect the index’s value, while at the same time ensuring that the index is not affected by non-economic factors.
One of the main reasons that the S&P 500 is thought of as an effective representation for the wider US economy is because it covers 500 companies from all areas of the US across the spectrum of industry. By way of contrast, the Dow Jones Industrial Average is only made up of 30 companies, which means that it is a far narrower reflection of more general overall macroeconomic trends.
The index can be broken down into more specific sub-sectors by industry classification, and it has recently undergone some changes with the introduction of the new sector for communications services, making it one of the 11 major S&P industry groups. However, the overall sway of the S&P 500 is all because of its wide-ranging nature.