Posted by The S&P 500 is the most famous stock market industry in the world. It contains the list of the top 500 biggest companies in the US. It consists of 11 different industries and provides a detailed picture of how the US market works, the health of the stock market, and the current economic conditions. But how are the top industries included in it? Do you think that you will invest in it and become a part of it? Then you are thinking wrong because it is not an investment instead it works on a market index. What is the market index and how S&P is calculated? Let’s see all those factors in detail.
What is the S&P 500?
As we have already described, the S&P 500 is not based on investment, instead, it works on the stock market index and includes the 500 largest publicly traded companies in the United States. Those companies belong to the 11 industries including technology, healthcare, financial services, and consumer goods. The S&P 500 is considered an indicator as it shows the overall health of the US economy. Most investors and financial professionals, including those looking for the best forex broker, use it to understand market trends, compare individual stock performance, and make informed investment decisions.
Which companies are included in the S&P 500?
As the S&P 500 works on a market index then to be eligible for this index, companies must meet specific criteria. These criteria include:
- Market Capitalization: Market capitalization means the total value of your outstanding shares in the market. For this eligibility, a company must have a market cap of at least $15.8 billion.
- Liquidity: Enough liquidity is required for stocks, and trading volume is usually used to measure this.
- Domicile: The company must be based in the United States.
- Public Float: A specific portion of the company’s shares must be publicly available.
- Sector Representation: The main purpose of the index is to maintain a balanced representation across various sectors of the economy.
Market Capitalization and its Role in the S&P 500
We need to describe this point here as it is important for you to know in detail about the market capitalization. Market capitalization is also called market cap, is the total market value of a company’s outstanding shares. It is computed by multiplying the market value of the shares outstanding by the current stock price. Each company’s weight in the S&P 500 is based on its market capitalization. That’s why larger organizations than smaller ones have an increased effect on the index’s total worth, such as Apple, Microsoft, and Amazon.
like if a company’s stock price rises then its market capitalization rises as well and also increases the company’s weight in the S&P 500. But if we see the other side then a company’s impact on the index decreases if its stock price falls.
How the S&P 500 is Calculated
Now hope you understand the whole concept of what is the S&P 500 and how the S&P 500 works so now let’s move to the main topic: how the S&P 500 is calculated. The calculation of the S&P 500 involves several steps:
1. Calculate the Market Capitalization of Each Company
The market capitalization of each index business is first calculated. To calculate this, multiply the current stock price by the total number of shares that are outstanding. Thus, a company’s market capitalization is $12 million if its stockholders currently own 2 million shares at a price of $6 each. Simply said, the company is valued at $10 million.
2. Determine the Index Divisor
The index divisor is a proprietary number used by the S&P 500. The S&P Dow Jones Indices committee selects the divisor, which keeps the index constant throughout time even when new share issues, splits in the stock market, and mergers and acquisitions.
3. Sum the Market Capitalizations
The overall market capitalization of the index is obtained by adding the market capitalization figures for each of the 500 firms.
4. Apply the Index Divisor
Finally, the current value of the S&P 500 is calculated by dividing the overall market capitalization by the index divisor. The formula is written as follows:
\text{S&P 500 Index Value} = \frac{\text{Total Market Capitalization}}{\text{Index Divisor}}
Throughout the trading day, this computation is continuously performed to keep up with changes in stock prices as they occur. Each quarter, the list is updated and evaluated.
The Role of Dividends in the S&P 500
Dividends are important, but capital appreciation is the main objective of the S&P 500. The S&P 500’s overall performance is influenced by dividend-paying companies in the index. Dividends are included into the total return version of the S&P 500, which incorporates both price appreciation and dividends, but are not directly included in the index’s price calculation.