What is the S&P 500?

Compared to indices like the Dow Jones Industrial Average (DJIA), the S&P 500 encompasses a greater number of companies and a wider range of industries, resulting in a more diversified representation of the market. The index consists of 500 common stocks, including real estate investment trusts, listed on the two major U.S. stock exchanges, the New York Stock Exchange (NYSE) and the NASDAQ. Almost all of the included companies are among the most heavily traded stocks in the U.S.

While the DJIA is price-weighted, the S&P 500 is market capitalization-weighted, which means that the stocks’ importance is determined by their market value. This approach provides a more accurate reflection of a company’s significance in the stock market. The S&P 500 is complemented by the S&P MidCap 400 Index, representing medium-sized companies, and the S&P SmallCap 600 Index, comprising smaller companies. Together, these indices form the S&P Composite 1500 Index.

While the DJIA is price-weighted, the S&P 500 is market capitalization-weighted, which means that the stocks’ importance is determined by their market value. This approach provides a more accurate reflection of a company’s significance in the stock market. The S&P 500 is complemented by the S&P MidCap 400 Index, representing medium-sized companies, and the S&P SmallCap 600 Index, comprising smaller companies. Together, these indices form the S&P Composite 1500 Index.

The constituent stocks of the S&P 500 are chosen by a committee, which periodically reviews and adjusts the composition of the index. Reconstitution takes place quarterly in March, June, September, and December. While the S&P 500 has a basic criteria for stock selection, multiple factors are considered to ensure its representative nature and ability to reflect the overall performance of the U.S. economy. This process is similar to the methodology employed for the DJIA and differs from many other indices, such as the Russell 1000 Index, which adhere strictly to fixed rules. 

As of July 26, 2023, the top ten constituents of the index were Apple, Microsoft, Amazon, NVIDIA, Tesla, Alphabet Class A, Meta Class A, Berkshire Hathaway Class B, Alphabet Class C, UnitedHealth Group. The largest constituent accounted for 7.5% of the index, while the top ten constituents (nine companies) collectively represented 30.2% of the index.

As a comprehensive benchmark for the U.S. Stocks, the S&P 500 reflects rather accurately the U.S. economy and stock market. Understanding the S&P 500 is essential for investors and financial professionals seeking insights into the overall trends and performance of the U.S. stock market.