Understanding the S&P 500 Index

For investors and financial professionals alike, it’s crucial to be able to accurately track the performance of various stocks in the market. An effective and common way to do so is using market indexes, which follow a mix of various companies in certain industries. The Standard and Poor’s, or S&P, 500 is a stock market index that tracks 500 of the top public companies in the United States.

This article will break down how the S&P 500 works, including the companies it includes and the criteria to be part of it. We’ll also explain the difference between it and the Dow Jones Industrial Average, another notable index. Finally, you’ll learn how to invest in market indexes such as this one.

What Is the S&P 500?

The Standard and Poor’s 500 (S&P 500) index is a well-known and highly followed capitalization-weighted market index. Originally founded in 1957, it allows investors to track the performance of 500 of the leading companies in the United States’ stock exchanges, including the New York Stock Exchange (NYSE) and Nasdaq. The index itself is operated by S&P Dow Jones Indices.

Because it tracks top performers across 11 different sectors, the S&P 500 serves as an important barometer for how the market is performing overall. Thomas J. Brock, CFA, CPA, says that many view it as a “proxy for the entire U.S. stock market.” As a result, the index is also an indicator of how the nation’s economy will perform moving forward.

The S&P 500 is a free-float or capitalization-weighted market index. This means that it takes a company’s share price and multiplies it by the number of shares available at a given time. This differs from other indices, such as the Dow Jones, which uses a price-weighted model to calculate its value.

Difference Between Dow Jones and S&P 500

The Dow Jones Industrial Average (DJIA) is also a market index that allows investors to track the overall performance of the stock market. However, it works a bit differently than the much larger S&P 500 index.

The first major difference, and perhaps the most noticeable, is the size of the S&P 500 vs. that of the Dow Jones. The former, as its title suggests, tracks just over 500 blue chip companies in the U.S. Meanwhile, the Dow measures the performance of 32 stocks. This is a much smaller sample size than other indices, which causes the latter to receive criticism regarding its accuracy.

The two indices also differ in how their value is calculated. The Dow Jones uses a price-weighted model, in which the price of a given company’s shares can heavily sway the index’s overall value. On the other hand, the S&P 500 uses a more complex free float method, in which it multiplies a company’s share price by the number of available shares.

Companies In the S&P 500 Index

As mentioned, the S&P 500 includes just over 500 of the largest and highest-performing stocks. According to Brock, these securities “come from all areas of the economy with prominent footprints in the information technology, financials, healthcare, consumer discretionary and communication services sectors.” For a company to be part of the index, it must meet certain criteria:

• Have a market capitalization (or total market value) of at least $15.8 billion.
• Maintain a level of market liquidity and public float, “with at least 10% of outstanding shares trading publicly,” per Brock.
• Have a minimum trading volume of $250,000 for six straight months before assessment or evaluation.
• Be a publicly traded company in the U.S. with a listing on the NYSE or Nasdaq.
• Receive at least 50% of revenue within the U.S. and maintain compliance with the U.S. Securities and Exchange Commission’s rules and regulations.
• Ensure that earnings from the most recent quarter and the last four quarters are positive.

The above ensures that the companies present in the S&P 500 are only top-performing and U.S.-based. In the index, you’ll find many household names across various sectors. This includes all of the businesses listed in the Dow Jones.

According to SPY, the following were top-weighted companies in the S&P 500 as of March 14, 2024:

Stock Name	Ticker Symbol	Weight
Microsoft Corporation	MSFT	7.31%
Apple Inc.	AAPL	5.85%
NVIDIA Corporation	NVDA	5.02%
Amazon.com Inc.	AMZN	3.76%
Meta Platforms Inc. Class A	META	2.52%
Alphabet Inc. Class A	GOOGL	1.96%
Berkshire Hathaway Inc. Class B	BRK.A	1.71%
Alphabet Inc. Class C	GOOGL	1.66%
Eli Lilly and Company	LLY	1.40%
Broadcom Inc.	AVGO	1.28%

How to Invest in the S&P 500

The S&P 500 is a collection of the highest-performing companies in the U.S. For this reason, the stocks within it are very popular among investors. Despite this, it can be difficult for people to know which stocks to add to their portfolio, especially since there are so many in the index to choose from.

There are two primary ways to invest in the S&P 500. First, you can simply buy individual stocks for firms within the index. While this allows you more control, it puts all the pressure on you to pick and choose which stocks to buy according to your portfolio goals. Alternatively, you can invest in an index fund that targets it. These are passively managed funds that allow you to own shares of a larger pot of various companies within the S&P 500.

If you would like to invest in an S&P 500 index fund, there are several to choose from. In some cases, the brokerage firm you’re working with, such as Fidelity or Vanguard, will have its own fund you can invest in. Here are common examples of index funds that track it:

• Fidelity 500 Index – FXAIX
• Schwab S&P 500 Index – SWPPX
• iShares S&P 500 Index – WFSPX
• Vanguard S&P 500 ETF/Vanguard 500 Index – VOO VFIAX
• T. Rowe Price Equity Index 500 – TRHZX

While investing in the S&P 500 is highly popular, we recommend speaking to a financial advisor before you begin. More specifically, an investment manager can help you determine whether the securities you invest in align with your goals, risk tolerance, and time horizon. To find a high-quality advisor, you can use this free matching tool, which will connect with you up to three vetted options that suit your needs.

Frequently Asked Questions

Is it a good idea to invest in the S&P 500?

Because the S&P 500 is a mix of the highest-performing publicly traded companies in the U.S., it’s widely popular among investors. However, whether investing in a given organization in the index is a good idea or not largely depends on your preferences, including your objectives, risk tolerance, and time horizon.

For many, it’s a relatively safer and less involved option to simply purchase shares of an index fund that tracks this segment. This allows you to reap the rewards of owning shares of S&P 500 businesses without having to conduct intensive research on companies within the index.

What is the all-time high for the S&P 500?

As of the writing of this article, the most recent all-time high for the S&P 500 was on March 12, 2024, closing at 5,175.27. On the flipside, the all-time low for the index was on March 9, 2009, when it closed at a staggering number of 676.53.

Is it better to invest in the S&P 500 or the Dow Jones?

It’s tough to definitively say which option is better for you as an investor. As always, it’s largely dependent on what your objectives are and how much risk you’re willing to take. The S&P 500 includes more companies, which could, in theory, produce larger returns (or losses). Meanwhile, the Dow has a fraction of the firms, but all of them are blue-chip businesses that tend to consistently perform well.

While not specifically commenting on whether he’d invest or not, Brock tells us he prefers “the Russell 3000 Index” as a means to “monitor domestic stock market performance and gauge economic sentiment.” He explains that this is because it follows “the performance of the 1,000 largest companies in the U.S. plus 2,000 mid-cap stocks and small-cap stocks, giving it a more holistic purview than the S&P 500. Ultimately, this enables the Russell 3000 to produce a more accurate approximation of the total U.S. stock market than the S&P 500.”

How often does the S&P 500 rebalance?

The index rebalances quarterly to keep up with any changes in company shares. This impacts which firms are included as constituents in the index.