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    Categories: Financial Blog

The S&P 500 Index

The Standard & Poor’s 500 Index is an index of 500 stocks of companies selected by economists and is seen as an indicator of U.S. equities and a view into the performance of the large cap stocks. The S&P 500 index is a market value weighted index and one of the common benchmarks for the U.S. stock market.

Importance

The S&P 500 has become the index of choice for U.S. stocks instead of the Dow Jones Industrial Average. Due to the amount of companies in S&P 500, it is seen to represent the market more than the Dow Jones Industrial Average which only contains 30.

There is also a big difference in how companies are represented in either index. The S&P 50 uses a market cap methodology which gives higher weighting to larger companies while the Dow Jones Industrial Average uses a price weighting methodology which gives more expensive stocks a higher weighting.

Criteria for Selection

A committee of the S&P 500 chooses components in a manner similar to the Dow Jones Industrial Average, but different from any other index such as the Russel 100, which are based strictly on rules. In order for a company to be qualified to be added to the index, the company will assess the company using eight primary criteria: market capitalization, domicile, sector classification, liquidity, public float, financial viability listing exchange and length of time publicly traded.

Maintenance

In order to maintain proper performance of the index, it is adjusted to capture corporate action which has an influence over market capitalization, such as additional share issuance, dividends and restructuring events like mergers and spin-offs. Stocks are changed from time to time in order to remain indicative of the U.S. stock market.

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