The Standard & Poor’s 500 Stock Index is popularly considered the best general benchmark of the American stock market. With 500 companies in virtually all industries, it accounts for nearly 75% of total U.S. stock market value.
Launched in 1957, S&P 500 stocks represent large U.S. companies, including familiar names such as Apple, Exxon Mobil, General Electric and Google. The index is widely followed by money managers, researchers and the media. Stock, mutual fund and investment portfolio performance are often compared to the S&P 500.
S&P 500 stocks represent the broad market
The S&P is value-weighted; meaning each company in the index is weighted by the total market value of all of its outstanding shares as a percentage of the total market value of all firms in the index.
S&P 500 stocks have had an annualized return of 10.4 percent since 1926. Of course, the market has had its share of meltdowns, from a high of over 1500 in March of 2000 to a low of 768 in October 2002. It took 7 years for S&P stocks to recover, but the rebound was short-lived. The market eased back down to 1400 by the end of 2007, was battered by the subsequent financial crisis, and took another 5 years to regain ground.
How stocks are accepted to the S&P 500
A committee selects the S&P stocks based on criteria that include:
- Market capitalization – S&P stocks must have total outstanding shares valued at $4.6 billion or more.
- Liquidity – Shares of S&P stocks need an active market, with a minimum of 250,000 shares traded in each of the six months leading up to evaluation.
- Financial viability – Companies being considered must show at least four consecutive quarters of positive earnings
S&P stocks are removed from the index if they are involved in a merger, sale or significant change in operations.
Buying S&P 500 stocks
It would not be feasible to purchase all 500 S&P stocks, but there are many mutual funds and exchange-traded funds (ETFs) that can serve the purpose. Vanguard was the first to offer such a product and the Vanguard 500 Index Fund (VFINX) is a popular choice for investors seeking exposure to all S&P stocks.
ETFs can also provide an easy investment in S&P stocks. Exchange-traded funds are like mutual funds, but are traded throughout the market day just like stocks. Mutual funds are priced and traded just once per day. S&P stock ETFs include SPY, IVV and VOO.