Known for providing a snapshot of the US economy, the S&P 500 is a stock market index composed of 500 large US companies across a variety of industries, including telecommunications, technology, and financial services. Created in 1957 by financial data firm Standard & Poor's (now S&P Global), the index represents roughly 80% of the US stock market's value.
The companies in the S&P 500 are chosen by a selection committee with strict criteria: They must be profitable for the four most recent quarters, have a market capitalization above $22.7B, and more. Each company in the index is weighted by its market capitalization, so companies with higher market caps have a greater impact on the index.
The S&P 500 is a list of stocks, not an actual security. However, investors can buy into financial vehicles like index funds that track the S&P 500's performance, giving them exposure to the index with relatively low long-term risk and minimal management.
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After accounting for each company's float-adjusted market capitalization (a metric that combines the price of a company's stock, the total number of shares, and the stock's float, which means how many shares are actually available), the S&P 500 formula uses a divisor to create the index number. However, what the divisor is and what it represents are secrets.
Since the index represents a broad range of diverse industries, it's become a proxy for the market itself and a common benchmark for investors to compare returns and performance patterns against. Generally speaking, when someone says a stock is under- or out-performing the market, that actually means under- or out-performing the S&P 500.
Poor's guide to the railroad industry helped investors evaluate changes and business decisions that might impact their investments. It was the first step in building the thorough datasets tracking companies and industries that Standard & Poor's is known for today.
Stocks are added to the S&P 500 by a secret selection committee that meets regularly to assess which companies can remain in the index, which companies need to be added, and which companies no longer meet the criteria. The members of the committee used to be public, but S&P Global decided to keep its members confidential after companies sent packages, letters, and gifts to try to make it into the index.
While the decision to add a company to the index is ultimately up to the selection committee, any prospective company has to meet some criteria to be considered. To join, the company must have been profitable for the last four quarters, must have a market capitalization exceeding $22.7B, and meet certain requirements around tradeable stock availability (or float).
John Bogle, the founder of The Vanguard Group, created a fund that tracked the S&P 500 in 1976. That fund created an unprecedented opportunity for individual retail investors, brought down fees across the board, and popularized the belief that passive, low-cost index fund investments would outperform actively managed portfolios long-term.
A stock index measures the performance of selected companies, offering a snapshot of market trends. Examples include the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite.
From the 1941 merger of Standard Statistics and Poor's Publishing to the creation of the S&P 500 in 1957, the company that created the famous index has long been a leader in financial intelligence.
Unlike previous indices from S&P, the S&P 500 could be computed in real time using computer technology that tracked stock tickers across stock exchanges. This innovation is partly what led to 500 companies being listed on the index, a huge increase from the 90 companies in S&P's flagship index when the company had to do all the analysis by hand.
This raised concerns for investors about the index's risk exposure. As many large tech companies continued posting record highs, analysts argued that the top-heavy index was becoming less representative of the economy as a whole.
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