The S&P 500

Cheat Sheet:

  • The S&P 500 stands for Standard & Poor’s 500.  It’s an index of 500 companies.
  • The S&P 500 is the main benchmark investors try to beat with their own stock portfolios.
  • The 500 stocks are updated regularly to represent the overall stock market.

The S&P 500 is another term you’ve probably seen online or on TV.  It is short for Standard & Poor’s 500, and like the Dow, it is an index. The biggest difference between the two is that it’s made up of a lot more companies, 500 instead of 30.

Investors often refer to the S&P 500 as a benchmark of performance:  “My portfolio beat the S&P 500 last year!”

The 500 stocks are selected by a committee that takes eight criteria into account: market capitalization, liquidity, domicile, public float, sector classification, financial viability, length of time publicly traded, and the stock exchange where the stock is traded.  (Imagine how much fun those committee meetings must be.)

Companies love being added to the S&P 500.  It’s not just the prestige of being a member, it’s because the company’s stock price tends to go up!  This is because lots of index funds (ETFs and mutual funds) are built to replicate the S&P 500, and they do this by buying and holding large quantities of all 500 stocks.  This creates demand for those stocks and pushes their prices upward.

If you want to invest in the stocks that make up the S&P 500, you don’t have to buy all 500 stocks separately. You can do it in one fell swoop by investing in an ETF.  A popular one is the SPDR S&P 500 (ticker symbol SPY).

previous lessonnext lesson