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A Guide to the S&P 500

The S&P 500, or to give it its full title, the Standard & Poor’s 500 is one of the American stock market indices. It is based on the market capitalisations of 500 big companies which have their common stock listed on either the NASDAQ or the NYSE. The components of the S&P 500 and the weightings that they are given are decided by the S&P Dow Jones Indices. The S&P 500 is different from the other United States stock market indices like the NASDAQ Composite Index or the Dow Jones Industrial Average because of its weighting methodology and its diverse constituency. The S&P 500 is believed to be one of top US stock market representations and thus it is one of the most popular equity indices followed by traders, standing as a barometer for the health of the American economy. The S&P 500 was created by S&P Dow Jones Indices, which is a joint venture that with majority ownership by S&P Global. As ell as maintaining the S&P 500, S&P Dow Jones Indices publishes numerous other indices including the S&P MidCap 400, the Dow Jones Industrial Average, the S&P Composite 1500 and the S&P SmallCap 600. Traditionally the index has been capitaliation weighted i.e. Stocks with higher market capitalisations will have a bigger impact upon the index’s value than companies that have smaller market caps, however today, the index is float weighted. This means that Standard & Poor’s calculated each company’s market capitalisation with relevance to the index by only using the number of shares the company has available to be publicly traded i.e their float. This transition took place over two steps, with the first taking place in March 2005 and the second taking place in September 2005.

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The History Of the S&P 500

sp 500 logoThe S&P 500 was originally known as the Composite Index when it introduced its initial stock index in the year 1923. At first, it only tracked a few different stocks, however in 1926, just 3 years later, the Index expanded to encompass 90 stocks, before expanding up to its current total of 500 in 1957. In 1860, Henry Varnum Poor founded a company called Standard & Poor’s, which gave financial analysis and information. His original company, Poor’s Publishing, was merged with another company, Standard Statistics (which had originally been named the Standard Statistics Bureau when it was formed in 1906) in 1941 and it was at that time that the name Standard and Poor’s Corporation came into being. The S&P 500 was created in its current form in 1957, however today the index can be calculated and disseminated in actual real time. Because it includes both value stocks and growth stocks, the S&P 500 is broadly regarded as a good measure of stock prices” general level. In 1962, Standard & Poor’s forged an agreement with Ultronic Systems Corp and this gave Ultronics control of the computation of a number of indices including the S&P 500 Stock Composite Index, the 50 Stock Utility Index, the 425 Stock Industrial Index and the 25 Stock Rail Index as well as computing and reporting the ninety four S&P sub indexes.

Selection Criteria for the S&P 500 Index

All of the S&P 500 index components are chosen by a committee in a smiliar way to the Dow Jones Industrial Average. This is different, however, from other indices like the Russell 1000 which has a rule-based selection criteria. When the committee consider whether a new addition is eligible to be added to the index, there are 8 different criteria that the company must meet. These include:

The companies that are chosen to appear on the S&P 500 are representative of the various industries that contribute to the American economy. Companies must meet certain requirements regarding liquidity including:

Securities must also be listed publicly on either NASDAQ (including the NASDAQ Capital Market, NASDAQ Select Market or the NASDAQ Global Select Market) or on the NYSE (including NYSE MKT or NYSE Arca). Some securities are not eligible to be included on the index, and these include:

Not only does the index include US companies, but it also includes companies that have never been incorporated in America and those that were once US incorporated but that have now re-corporated outside the country.

Maintenance of the Index

So that the S&P 500 Index can remain consistent over a longer period of time, adjustments are made to capture any corporate actions which could affect market capitalisation. This includes events such as dividends, share issuance or any restructuring event like a spin off or merger. To remain representative of the United States stock market, the component stocks on the S&P 500 are periodically changed, with some components being removed and some added. All actions which affect the Index value are adjusted using a divisor to prevent change occurring merely because of corporate financial actions. Any divisor adjusment takes place after trading closes for the day and after the closing value of the S&P 500 index has been calculated. The various actions which require a divisor adjustment to be made include the following:

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