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The stock market is continuously being tracked by tools known as stock indexes. They do so by selecting an ample number of business stocks that match specific criteria. Once that is done, they recollect numerical data concerning the performance of those same companies over time.
For that reason, stock indexes usually represent an excellent opportunity to carry out research that allows one to better decide upon a worthy investment.
Of course, that means that the sheer number of stock indexes available within the market is exceptionally high. But if what you’re looking for is a performance review of the overall stock market’s performance, as well as how the largest corporations are doing, you can do no better than going with the S&P 500 Index.
What is the S&P 500 index?
The Standard & Poor’s 500 (S&P 500 for short) is an index that is constantly tracking the stocks of whichever 500 companies are currently being considered the largest among the United States’ stock market. Due to this, the S&P 500 is usually also viewed as a performance review of U.S. stocks in general.
To have a better understanding of how the S&P 500 Index works, it is important to consider the following key points:
- Out of all the companies included in the index, the largest ones usually significantly influence that index’s performance review.
- Even if the index references the 500 largest companies in the country, there is still a wide difference among them. For example, companies at the top of the list have market caps at around $1 trillion, contrary to those at the bottom with caps of about $6 billion.
- The values stated by the S&P 500 fluctuates continuously throughout the day, based on the daily performance of all its components.
What companies are included in the S&P 500 index?
As of February 2020, these are the 10 largest companies in the U.S. These are also the companies that influence the S&P 500 index the most:
- Berkshire Hathaway Class B
- Alphabet Class C
- Alphabet Class A
- JPMorgan Chase
- Johnson & Johnson
You might have noticed that Alphabet appears twice on the Top 10 list. Well, that’s because some companies deal with stocks by issuing more than one class of shares at the same time. However, it is not that common. Still, because of this, today’s S&P 500 is composed of 505 stocks provided by the top 500 companies in the U.S.
It is also worth noting that the S&P 500 is also subject to changes over time. The companies that are part of it can be replaced or moved around at any moment, depending on their ever-changing performance and the market’s newcomers. It is probably not now, nor soon, but this change could occur later.
Now you know the basics about how the S&P 500 works…
Why is it considered the best reference for the U.S. stock market?
When it comes to numeric data alone, regardless of how many small companies are just within the U.S. territory, their stock market values are too small to represent the U.S. stock market as a whole. On the other hand, the largest 500 companies cover about 80% of it.
But what about other, similar stock indexes?
Probably the most known alternative for the S&P 500 is the Dow Jones Industrial Average. In short, the Dow Jones is instead a stock index that only covers the 30 largest companies in the U.S. It’s probably the value that you most commonly see when researching the market on media such as television.
However, a big issue comes into the open by covering only 30 companies instead of 500: Dow Jones excludes some of the market’s biggest stocks. Companies such as Amazon and Alphabet are being left out, disregarding how valuable they are for the market.
The Dow Jones average is also calculated differently from the S&P 500 since it measures the average stock price instead of using market-caps for reference. If you were to need to measure the performance of the U.S. stock market as a whole, giving weight to market caps would make more sense.
How to invest in the S&P 500 index
If you are looking to invest in this index, you can choose an index fund for that same purpose.
Usually managed by professional financial firms, an index fund is meant to track a specific stock index and invest in every component included on the list while considering the information received on their respective performances. They make modifications to your investments to comply with the information to mimic that same performance. That could be one way for you to invest in the S&P 500 Index. If interested, try with Vanguard 500 Index Fund Admiral Shares!
Or else you can also try with Exchange-traded Funds or ETFs.
Commonly offered by any brokerage account provider, ETFs are tools that enable you to buy several amounts of stocks or bonds simultaneously. You give them a specific number of shares or companies to be purchased within a particular index, and your ETF will automatically make investments in your name based on your specifications.
If you are looking for even more options, you can try with The Vanguard S&P 500 Index instead.
Why should you invest in the S&P 500 index?
Investing in the S&P 500 Index has already been recognized by famous investor Warren Buffett as one of the best options for investments any person can make. Records have shown that even the smallest investment, in the long run, can deliver returns of 9-10%.
However, we recommend you give yourself the time and discipline to do an appropriate amount of research on the subject and then build up your own experience over time. Once you feel comfortable enough to say your investment goals are within reach, you are now truly ready to begin.
In short, the S&P 500 is one of the better options to build wealth over time with minimal effort on your part, but it still requires a certain level of commitment beforehand.