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The S&P 500 is a stock market index that tracks 500 listed US companies. It is a highly regarded barometer of the overall stock market and as investors it is important to understand its role in your portfolio.
The S&P 500 stands for Standard and Poor’s Index. It is weighted by market capitalization, which means that the larger the company, the more influence it has on the index.
Investing in hundreds of companies makes sense for your portfolio. That is why investors should invest in index funds, such as those that track the S&P 500. That way, if an individual company or industry goes through a recession, your money is protected and diversified. There are also other indices, such as the Dow Jones Industrial Average.
“The S&P is one of the best benchmarks of major U.S. publicly traded companies, as there is a broad representation of companies that fall into this category of large cap stocks,” said John Hagensen, owner and founder of Keystone Wealth Partnersan asset manager.
Where you place investment money matters, and the S&P 500 has a lot to do with it. Here’s what it is and how it affects your money.
Which companies are in the S&P 500?
There are a total of 500 companies and 505 stocks that make up this index. Companies include Apple, Microsoft, Amazon, Facebook, and Tesla, just to name a few. These large companies make up 80% of the total value of the stock market.
Other companies include JPMorgan Chase, Johnson and Johnson and Berkshire Hathaway.
How to invest in the S&P 500
Investing in the S&P 500 is a good way to get a diverse investment portfolio. You can buy into the S&P 500 by buying mutual funds or ETFs that track this index. This helps diversify your money among these hundreds of companies.
Use the S&P 500 as a measuring instrument for investing. Investing in low-cost index funds that track this index is a great way to diversify your portfolio.
These types of investments are also low cost, meaning you can get into these investments for virtually free. Over time, with a little effort on your part, the S&P 500 can provide strong returns for your portfolio. You can open a cheap index fund with a brokerage firm. Check out NextAdvisor’s list of the best online brokers.
S&P 500 vs. Dow Jones Industrial Average
While the S&P 500 and the Dow Jones Industrial Average are both indices that you can trade on, they are not created or managed in the same way.
The Dow Jones tracks about 30 companies, while the S&P 500 has 500 companies. This gives the S&P 500 a wider reach of the overall market.
S&P vs Russell Indices
The Russell Indexes are a collection of indices, and each has its own specific tracking and measurement systems. For example, the Russell 2000 tracks 2,000 of the smallest U.S. publicly traded companies. The Russell 3000 tracks 3,000 of the largest US publicly traded companies.
While they both use capitalization weighted methods to determine the weight of each stock on their indices, how companies are added is a little different.
“The Russell indices add several companies through painstaking formulas and calculations, while the S&P 500 uses a committee of individuals to decide which companies to include,” Hagensen said. “This explains why some companies have large market caps but are not included in the S&P 500, as the committee can choose not to include companies in its sole discretion.”
The types of companies on the Russell Indexes and the Dow Jones Industrial Average have their own requirements. Because of this, they may not be as representative of the US stock market, but rather different sectors or industries.
Limitations of the S&P 500 Index
Remember that the S&P 500 gives the most weight to the companies with the most market capitalization.
Hagensen says the top four companies in the S&P 500 account for more than 20% of the index’s total value. That’s a significant amount. That means 496 other companies represent the remaining 80%. This shows that the bigger the company is, the more power they have in controlling the index. The lower the market cap, the less weight they have on the overall S&P 500.