What Is the S&P 500 Index?

Here’s everything you need to know about where this famous list comes from and what it means for investors.

Written by Melissa A. Watkins / December 6, 2021

Quick Bites

  • An index is a tool that tracks the performance of a group of stocks. It tells you if certain companies and industries are increasing or decreasing in value.
  • S&P stands for Standard and Poor’s, a merger of two companies originally founded in the 1800s. S&P now does research, analyzes data and creates indexes of companies.
  • The S&P 500 is one of the most reliable measures of how well U.S. companies are doing. It shows the average return on investments the public makes when we invest in the 500 companies on the list.
  • If you want to invest in the S&P 500, you can buy shares in an ETF (exchange-traded fund) or index mutual fund. Both allow you to invest in multiple companies at once. Index mutual funds often have lower costs, but ETFs can be more flexible.

If you’re like the rest of us, you’re probably bombarded by news about the stock market—its ups and downs, which company has the biggest gains, which the biggest losses. One term you may keep hearing is “S&P 500.”

So what is it exactly, and why should it matter to you? The short answer is it’s a stock index that tracks how well the stock of 500 large U.S. companies is performing.

An index, in stock market terms, is a tool that uses data to track the performance of a defined group of stocks. In other words, an index tells you if certain companies and industries are increasing or decreasing in value.[1]

Read on for more on this important stock market index, and how you can make it a part of your financial planning.

Inside this article

  1. What does S&P 500 stand for?
  2. Criteria for inclusion
  3. Other indexes
  4. Buying stock in the S&P 500

What does S&P 500 stand for?

S&P stands for Standard and Poor’s, a merger of two companies that were originally founded in the 1800s. One company published documents that informed the public about the American railway industry, and the other published statistics about large companies.

The two companies merged in 1941, forming a corporation.[2] Now they do research, analyze data and create indexes of companies. The “500” in S&P 500 refers to the 500 companies whose data is analyzed to create the index.

The S&P 500 is one of the oldest and most reliable measures of how well companies are doing in the U.S. economy. It shows the average return on investments the public makes when we invest in the companies on the list.

The S&P also gives an idea of how well companies do historically. For example, the value of the S&P 500 has been climbing since 1990, meaning that overall, the values of the top 500 companies in the U.S. have been increasing steadily for over 30 years.

How are S&P 500 companies chosen?

The criteria for companies that are included in the S&P 500 is very thorough. The companies included in the index are reviewed regularly and updated quarterly, so the list changes to reflect the development of the U.S. economy.[3]

The main criteria are:

  • The company must be based in the U.S.

  • The company must be a corporation, not a partnership or other business structure.

  • The company must be listed on a major U.S. stock exchange (NYSE or Nasdaq).

  • The company needs to prove positive earnings in the most recent quarter. In other words, it needs to show it’s made money in the past three months.

  • The company has to have market capitalization of over $13.1 billion. Market capitalization, or market cap, is the value of all the shares of stock a company has available to sell or that have been sold. It’s calculated by multiplying the price of a share by the total number of shares released to the public, sold or unsold.[4]

Tip: Not every company is equally weighted in the S&P 500. Companies with a bigger market cap—for example, Apple, Microsoft and Amazon—have a higher impact on the index than smaller companies do.

Are there other stock market indexes?

There are three major stock market indexes in the U.S.: the S&P 500, the Dow Jones Industrial Average and the Nasdaq Composite.

The Dow Jones Industrial Average (also called the Dow Jones or just the Dow) was created in 1896 by Wall Street Journal founder Charles Dow and his colleague Edward Jones. It’s based on the performance of 30 publicly traded companies.

While the S&P 500 provides a broad view of performance and overall market conditions, the Dow is more focused on the market movement of the top-performing companies. The 30 companies that form the Dow Jones Industrial Average represent less than 1% of the overall market. So while it gives a great picture of how certain companies are performing, it doesn’t provide a complete view of the overall economy.[5]

Also, the criteria for including a company on the Dow Jones are not publicly shared, so exactly what the index means is a little more opaque than the S&P 500 or Nasdaq Composite.

The Nasdaq Composite, created in 1971, is the newest of the major stock market indexes.

It’s not the same thing as the NASDAQ (National Association of Securities Dealers Automated Quotations), which was the world’s first electronic stock exchange. The Nasdaq Composite is the index created from that stock exchange, specifically to measure and explain the new and different companies and customers it catered to.

It includes over 3,000 stocks. Like the S&P 500, the Nasdaq Composite uses market cap as one of the criteria to select companies. Unlike the S&P, the Nasdaq Composite is heavily made up of tech companies.[6]

The Dow focuses on a very exclusive group of companies that have been proven profitable over time and the Nasdaq leans more toward innovation, startups and future industries.

How can I buy stock in the S&P 500?

If you want to invest in the S&P 500, you can buy shares in an ETF or index mutual fund.

An ETF (exchange-traded fund) is a way to invest your money in multiple companies at once. Basically, your invested money goes into a pool that a company uses to invest in many different companies. You get a return on those combined investments based on how much you contributed.[7]

Because ETFs gather money from a lot of investors, they’re able to make large investments. If you can’t afford to buy significant amounts of stock in Google or Apple just yet, an ETF can be a way to get your foot in the door and grow a small investment into a much larger one.

An index mutual fund is similar to an ETF, but constructed a little differently. Index funds mimic the performance of the entire stock index.

With an index fund, you essentially own stock in every company on the index. These index funds usually have lower costs than ETFs, because no one has to actively manage and choose which stocks the fund will invest in—the fund invests in them all. But you can trade mutual funds only at the end of the day, whereas ETFs can be traded anytime throughout the day, like stocks.

If you prefer to choose individual companies in the S&P 500 and invest in them, you can find a list of the companies on the S&P Global website. Just be sure to do your research before you purchase an individual stock, or talk to a financial advisor or planner who can help you manage your investments.

Article Sources
  1. Market indexes. SEC.gov. https://www.sec.gov/fast-answers/answersindexeshtm.html.
  2. Our History. S&P Global. https://www.spglobal.com/en/who-we-are/our-history.
  3. S&P U.S. indexes Methodology. S&P Global. https://www.spglobal.com/spdji/en/documents/methodologies/methodology-sp-us-indexes.pdf.
  4. Market Capitalization. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-market-capitalization.
  5. Dow Jones Industrial Average. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/dow-jones-industrial-average-djia.
  6. Bhajpai, P. What Is the Nasdaq Composite, and What Companies are in It?. Nasdaq. https://www.nasdaq.com/articles/what-is-the-nasdaq-composite-and-what-companies-are-in-it-2021-05-12.
  7. Investor Bulletin: Exchange-Traded Funds (ETFs). Investor.gov. https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-24.

About the Author

Melissa A. Watkins

Melissa A. Watkins

Melissa Watkins is a former social and cultural studies lecturer who became a writer. Her financial experiences overseas and abroad include small business ownership, endless side hustles, and founding a networking organization for overseas business owners in South Korea.

Full bio

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