The S&P 500 is a U.S. market index that serves as a barometer for the movement of the U.S. equity market. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. The value of the S&P 500 constantly changes throughout the trading day based on its underlying constituents, not only following the share price of each company but the number of shares being traded as well. Outstanding shares, which are shares not owned by investors and are available for purchase, are referred to as a company’s float.
- The S&P 500 is the benchmark index for large U.S. corporations and is followed closely by economists, investors, and the financial press.
- The index is currently made up of the 505 largest publicly-traded U.S. stocks using a free-float market capitalization weighting method.
- This means that the largest and most valuable companies will also carry the greatest weight in the index.
- The index is always in a state of flux and rebalances regularly.
- A company needs a minimum market capitalization to be eligible to be listed on the S&P 500.
The S&P 500 Deconstructed
Because the index includes multiple classes of stock of some constituent companies—for example, Alphabet’s Class A (GOOGL) and Class C (GOOG)—there are actually 505 stocks in the gauge.
The S&P 500 Index’s value is computed by a free-float market capitalization-weighted methodology. The first step in this methodology is to compute the free-float market capitalization of each component in the index. This calculation takes the number of outstanding shares of each company and multiplies that number by the company’s current share price, or market value.
Since the S&P 500 is free-float market capitalization-weighted, the market capitalizations only include the shares that are actively available in the market. As such, this excludes nominal shares allocated with exercise rights to executives and other interested parties.
Calculating Market Weights
For example, Apple reported 16.41 billion common shares as of Oct. 15, 2021, and it has a current market price of $172 per share. This market price gives the company a free-float market capitalization of $2.82 trillion.
The market capitalizations for all constituent stocks are summed to obtain the total market capitalization of the S&P 500. This value is used as the numerator in the index calculation.
Calculating the individual market weights shows how the underlying stocks affect the index. The individual market weights are calculated by dividing the free-float market capitalization of a company in the index by the total market capitalization of the index.
On Jan. 9, 2022, the S&P 500 total market cap was approximately $40.36 trillion. This implies that Apple makes up roughly 7.0% of the index’s market weight. Overall, the larger the market weight of a company, the more impact a change in a stock’s price will have on the index.
Free-Float Market Capitalization Methodology
S&P details the mathematical calculations of its free-float market capitalization methodology to lend transparency to its reporting value.
The calculation for the S&P 500 is:
Index Level=Divisor∑i=1nPi×Qiwhere:Pi=PriceQi=Free-float shares
This calculation is compared to the S&P 500 equally weighted index which uses the following calculation integrating an equal weighting factor:
Index Level=Divisor∑i=1nPi×IWFi×Shareswhere:Pi=PriceIWFi=The equal weighting percentage
The S&P 500 and the S&P 500 Equal Weighted Index use an index divisor that scales the index down to a more manageable and reportable level. The divisor is a proprietary value that can change with stock splits, special dividends, spinoffs, and other variables that could affect the index’s value.
Why It Matters
The S&P 500 is one of, if not the, most widely viewed indexes in the world. It not only represents the largest companies in the U.S. but since the U.S. is the world’s largest economy by a significant margin, there are many who simply consider the S&P 500 a representation of the health of the current market. Certain companies who have market caps in the trillions have an effect on the S&P 500 when they rise and fall, but it is typically only entire sectors that can substantially move the index.
Since the index is so broad and diversified, it typically only makes major moves when major events occur such as a change in the federal funds rate or if a war breaks out affecting imports, exports, or trade between markets. When investors compare individual stock performance against an index, it is almost always that stock’s performance versus the S&P 500. Money managers will compare their performance against the S&P 500 to determine if they beat market returns, referred to as delivering alpha.
How Is an S&P 500 Return Calculated?
The S&P 500 return is calculated the same way an individual stock return would be calculated. If an investor purchases exposure to the S&P 500 through an ETF such as SPY, and the value of the S&P 500 rises, their ETF will track that rise and the profit will grow. ETFs usually charge a minor management fee called the expense ratio, which is subtracted from the return of the ETF and any dividends that are distributed to the investor during ownership.
Why Does the Value of the S&P 500 Matter?
The value of the S&P 500 matters because it is the number one benchmark of the U.S. market’s health. Investors consider almost all their investment performances versus the S&P 500. When an investor talks about beating the market, they are almost always referrring to delivering more than the S&P 500 did during a specific period of time. The value of the index and its price has a direct effect on investor sentiment and risk appetite.
What Is the S&P 500 Index?
The S&P 500 index is a basket of stocks. In this basket are the largest 500 companies in the United States as determined by market cap. There are many ETFs that investors purchase that mirror the performance of the S&P 500, and are considered the core of most investor portfolios.
The Bottom Line
The S&P 500 index is a benchmark index that investors use in a variety of ways. The S&P 500, despite being made of over 500 companies, is relatively easy to calculate. Fortunately for most investors, there is almost no reason or need to do the balancing yourself as both the S&P 500, and the funds that track it, is balanced by powerful algorithms overseen by professionals.