Definition of the S&P 500 Index
- Standard & Poor's 500 Index is defined as a market capitalization weighted index of the five hundred, largest, publicly traded companies in the United States.
- This index is said to represent the best picture of the large-cap equities in the US market.
- Its float weighted index for the market capitalization of the company is adjusted against the number of shares available for public trading in the secondary market.
- Numerous funds are designed to track the ups and downs and overall performance of this index.
- It comprises stocks across all sectors as opposed to Dow Jones Industrial Average Index which has a more limited coverage.
Arriving at the Index
- The market capitalization of the company is the product of the current stock price and its outstanding, free floating shares.
- The value of the index is calculated by adjusting the market caps of each company and dividing the final result by a divisor. The said divisor is not available in public domain.
- Since, the market capitalization weighting method is used for the calculation of the index, the percentage allocation is higher for companies with larger market capitalization.
- Calculation of a company’s weightage in the index offers the investors a valuable insight regarding its performance. -
Advantage of the S&P Index
- Passive management of the funds can be done without indulging in intense intraday trading.
- The high number of constituents of this index reduces exposure to market risk.
Limitations of S&P 500 Index
- Stocks in the index become overvalued rising higher than their fundamentals warrant.
- This might result in inflating the overall value of the index.
- Ambiguity about the index’s divisor.
- The index has a very narrow focus of the top 500 companies only in the United States and ignores accounting for foreign companies.
Other S&P Indices
- S&P 500 is a part of a larger group of S&P Global 1200 family of indices.
- Other indices present in the group are –
- S&P Mid Cap 400- represents the mid-cap range of companies.
- S&P Small Cap 600- which represents small-cap companies.
- S&P Composite 1500 – which is a combination of S&P 500, S&P Mid Cap 400, and S&P Small Cap 600.
