Much like the DJIA—or, the “Dow”—the S&P is a stock market index.
What’s a stock market index?
If the stock market is a giant jigsaw puzzle, you can think of an index as a magnifying glass. In the case of the S&P, your magnifying glass allows you to take a closer look at the 500 biggest, most prominent pieces of the puzzle, giving you a clearer picture of the finished product.
But before we get too far into the weeds, let’s start with the stock market, which is where stocks, bonds, and other assets are bought and sold.
When talking about the stock market, you generally hear people using a stock market index in reference to the market’s performance.
A stock market index, then, is an index, or measurement, of a market. Specifically, an index is a tool (like a magnifying glass) used to examine, express, or describe what’s happening in a stock market.
An index is simply a curated list of certain securities. A security is an investment product, including stocks, bonds, and mutual funds.
The bellwether index—the index used by most investors to express the stock market’s performance — is the S&P 500 (ticker: SPX).
What is the S&P?
“S&P” means Standard & Poor’s, which is a financial services company founded in 1860. It researches and analyzes stocks and other securities, and acts as one of the big credit-rating agencies in the U.S.
S&P is also well-known for its stock market indices, including the S&P 500.
The S&P vs The S&P 500
If you hear someone discussing “the S&P”, they’re almost certainly referring to the S&P 500. If the S&P 500 were a Spotify playlist, it would be a list of the most popular and listened to songs, no matter the genre.
The S&P 500, launched in 1957, is a list of the biggest companies that are traded on the New York Stock Exchange and Nasdaq. It’s an index based on the 500 largest companies by market capitalization, or market cap.
Every quarter, a committee rebalances the index by selecting the 500 core companies. To qualify for inclusion on the index, a company must have a market cap of $6.1 billion, 50% of its stock must be public, and its stock price must be at least $1 per share.
What’s in it?
The S&P 500 represents roughly 80% of the market’s available market capitalization, according to Standard & Poor’s, making it a relatively good indicator of the market’s movement over time.
The index includes companies from all across the spectrum, from energy to healthcare.
The biggest companies in the S&P 500 include Apple, Microsoft, Amazon, Berkshire Hathaway, Facebook, and JPMorgan Chase & Co.
Other S&P Indices
The S&P 500 is only one of several S&P indices. These include the S&P MidCap 400, the S&P SmallCap 600, and even the Dow Jones Industrial Average.