Are you interested in knowing how the stock market works? If yes, you are in the right place. In this article, you will learn how the stock market works. Also, you will learn other vital details.
The S&P 500 is a stock market index that tracks the stocks of 500 large-cap U.S. companies. It represents the stock market’s performance by reporting the risks and returns of the biggest companies.
Also, investors use it as the benchmark of the overall market; they compare this to other investments too.
Do you know that by Aug. 31, 2020, the S&P 500 had an average 10-year annual return of 12.66%?1 S&P stands for Standard and Poor, the names of the two founding financial companies.
Further, on March 4, 1957, the S&P 500 was officially introduced by Standard & Poor. Actually, McGraw-Hill acquired it in 1966. The S&P Dow Jones Indices owns it now and that’s a joint venture between S&P Global (formerly) McGraw Hill Financial, CME Group, and News Corp, the owner of Dow Jones.
How does the S&P 500 Work?
The S&P 500 tracks the market capitalization of the companies within its index. Market cap is the total value of all shares of stock a company has issued within a time frame.
They calculate it by multiplying the number of shares issued by the stock price. If a firm has a market cap of $100 billion, it gets 10 times the representation of a company whose market cap is $10 billion. As of July 2020, the total market cap of the S&P 500 was $27.05 trillion. Does this surprise you?
How is the index weighed?
Usually, the index is weighted by a float-adjusted market cap. It only measures the shares available to the public. It does not count those held by control groups, other companies, or government agencies.
There is usually a committee to select each of the index’s 500 corporations based on their liquidity, size, and industry. The committee rebalances the index quarterly. This occurs in March, June, September, and December.
For a company to qualify for the index, it must be in the United States. Also, it must have an unadjusted market cap of at least $8.2 billion. On the other hand, at least 50% of the corporation’s stock must be available to the public. Its stock price must be at least $1 per share. It must file a 10-K annual report. Moreover, at least 50% of its fixed assets and revenues must be in the United States. Lastly, it must have at least four consecutive quarters of positive earnings.
This is very important; the stock must be listed on the New York Stock Exchange, Investors Exchange, Nasdaq, or BATS Global Markets.
List
By Aug. 31, 2020, the 10 largest companies, with a weighted market cap, in the S&P 500 were:
Alphabet Inc. C (GOOG)
Johnson & Johnson
Berkshire Hathaway B
Proctor & Gamble
Visa Inc. A
The makeup of the S&P 500 industries reflects that of the economy.
Apple Inc.
Microsoft Corp.
Also, Amazon.com Inc.
Facebook Inc. A
Again, Alphabet Inc. A (GOOGL)
By Aug. 31, 2020, the S&P 500 sector breakdown included:
Industrials: 7.9%
Consumer Staples: 7.0%
Utilities: 3.1%
Real Estate: 2.8%
Information Technology: 27.5%
Health Care: 14.6%
Consumer Discretionary: 11.2%
Communication Services: 10.9%
Financials: 9.9%
Information Technology: 27.5%
Health Care: 14.6%
Consumer Discretionary: 11.2%
Communication Services: 10.9%
Financials: 9.9%
Materials: 2.6%
As well as, Energy: 2.5%1
S&P 500 vs. Other Stock Market Indexes
Do you also know that the S&P 500 has more large-cap stocks than the Dow Jones Industrial Average? The Dow tracks the share price of 30 companies that best represent their industries. The market capitalization of Dow accounts for almost one-quarter of the U.S. stock market. The Dow is the most quoted market indicator in the world. No one can argue about this.
Further, the S&P 500 has fewer technology-related stocks than the Nasdaq. As of April 2020, 57% of Nasdaq allocations were in information technology compared to 23% for the S&P 500 at that time.
However, not-minding the differences, all these stock indexes usually move together. But if you concentrate o a particular one, you will understand how well the stock market is faring. Just choose one and follow it up.
Milestones of the S&P 500
The table below indicates many milestone events of the S&P 500. Check the highs and lows, and other memorable moments.
Date Close Event
Jan. 3, 1950, 16.66 Record closing low, first close
June 4, 1968, 100.30 First time, above 100
Oct. 19, 1987, 224.84 Black Monday
March 24, 1995, 500.97 First close above 500
Feb. 2, 1998 1,001.27 First close above 1,000
Oct. 9, 2007, 1,565.15 Highest close before the financial crisis
Oct. 13, 2008 1,003.35 Largest % gain of 11.6%
March 28, 2013 1,569.19 New record high
Aug. 26, 2014 2,000.02 First close above 2,000
Sept. 21, 2018 2,929.67 New record high
Oct. 3, 2018 2,937.06 Highest intra-day
July 12, 2019, 3,013.77 First close above 3,000
Feb. 19, 2019 3,393.52 New record high
March 12, 2020, 2,480.64 Largest % decline since Black Monday, entered a bear market
March 23, 2020 2,237.40 Stock crash low
August 18, 2020, 3,389.78 New record high, end of a bear market
Again, on August 24, 2020, 3,431.28 Breaks 3,400.
As well as, August 28, 2020, 3,508.01 Closes above 3,500
How to Use the S&P 500 to Make Money
Even if you can’t invest in the S&P, you are free to imitate its performance with an index fund. Many people even buy shares of stocks that are in the S&P 500. However, before buying, weigh the stocks in your portfolio according to their market cap.
Further, always use the S&P 500 as a leading economic indicator of how well the U.S. economy is doing. Whenever investors are confident in the economy, they will always buy stocks.
Also, consistently monitor foreign markets, especially countries like China and India. It is necessary too to keep 10% of your investments in commodities such as gold. This is because commodities like gold hold value for a very long time when compared to stocks.
Moreover, following the S&P 500 means, you should also follow the bond market. Even Standard & Poor’s also gives bonds credit ratings. Whenever stock prices go up, bond prices go down. The bonds include Treasury bonds, corporate bonds, and municipal bonds. These bonds offer some of the liquidity that keeps the U.S. economy lubricated. They are most valuable on mortgage interest rates. . . . .
Conclusion
Investors usually look at the S&P 500 to know the performance of the stock market. No wonder this index is considered a leading U.S. economic indicator.
It goes further to track 500 publicly traded, large-cap U.S. companies. All of these businesses must meet specific criteria in order to be a part of the S&P 500.
The economic makeup of the United States is the mix of industries that make up the S&P 500 list. If you are an investor, you can buy stocks listed on the S&P 500 or invest in index funds that track the S&P 500. There is a lot of profit here.
I hope you got value, keep your questions in the comment section.
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