S&P 500 Index: What Is It & How Does It Work?

Whether you’re a day trader or a long-term investor in simple index funds, understanding the S&P is crucial.

Though it only covers the United States, the S&P 500 Index—aka “the S&P” or “the S and P 500”—ranks among the world’s best-known and most important stock market indexes. It’s undoubtedly one of the most closely followed, and for good reason. Among other features, the S&P contains all the largest and most famous U.S. companies, from Apple and Alphabet to Tesla and Johnson & Johnson. 

But what is the S&P 500, more specifically? And what does S&P stand for, anyway? We’ll examine its contents, history, methodology, and significance.

What is the S&P 500?

Comprising 500 of the largest publicly traded companies in the U.S., the S&P 500 is a yardstick for assessing the nation’s economic health and financial performance. The selection of these companies is meticulous, considering factors such as market capitalization, liquidity, financial stability, and more. 

Owing to its diverse composition, the S&P offers a nuanced reflection of the American corporate landscape, especially as its membership changes over time. Most recently, Airbnb (ABNB), Palo Alto Networks (PANW), and the investment manager Blackstone (BX) were added.

Where once most of the S&P 500 were companies operating in manufacturing, the index is now much more tilted to .coms, tech, and tech-adjacent companies, reflecting changes in the U.S. economy as a whole.

In fact, the S&P dates back to the 1950s, when it was created by the financial services company Standard & Poor’s (also known as "S&P,” "Standard Poor's," and “S&P Global”) as an index to provide a comprehensive, accurate snapshot of the U.S. stock market.

Over the decades, it’s weathered downturns, bull and bear markets, and numerous financial crises, emerging as perhaps the most reliable barometer of the U.S. economy’s health and becoming a fixture of news reports worldwide. 

The S&P 500 forms a cornerstone of the financial world, influencing investment decisions, shaping financial products, and driving economic discussions in the U.S. and beyond. 

What companies are in the S&P 500?

The S&P 500 Index contains publicly traded companies ranging from marquee-name tech giants to the nation’s most powerful financial institutions. Here are some of the most well-known companies that constitute the S&P 500:

Apple Inc. (AAPL)

A global leader in consumer electronics, this technology behemoth is known for its iconic products, including the iPhone, iPad, Mac, Apple Watch, and more. 

Tesla, Inc. (TSLA)

Tesla is revolutionizing the automotive industry with electric vehicles and sustainable energy solutions. Tesla CEO Elon Musk is a well-known personality in the tech and business spheres.

Amazon.com, Inc. (AMZN)

Amazon is the world’s largest e-commerce platform, offering various products and services, including online retail, cloud computing, and streaming. Its Prime membership program counts 200 million members worldwide, while its AWS division is a pillar of the global internet.

Alphabet Inc. (GOOGL)

Alphabet is the parent company of Google, the leading global search engine and a significant player in the tech R&D space. Alphabet also encompasses other tech ventures, such as Waymo and YouTube.

Nvidia Corporation (NVDA)

Nvidia specializes in graphics processing units (GPUs) and is a vital player in the gaming, artificial intelligence, and data center markets. Its chips power some of the most in-demand consumer products in the world.

Meta Platforms, Inc. (META)

Formerly known as Facebook, Meta Platforms is a social media and technology conglomerate that has acquired a string of smaller, innovative players to grow its influence. It’s best known as the parent company of Facebook, Instagram, and WhatsApp. 

Microsoft Corporation (MSFT)

Founded by Bill Gates and Paul Allen, Microsoft is a long-standing software and technology giant known for its Windows operating system, Office suite, and Azure cloud services. It also presides over a massive gaming operation, including the Xbox console and several major game developers.

Johnson & Johnson (JNJ)

Johnson & Johnson is a multinational healthcare corporation producing pharmaceuticals, medical devices, and consumer goods. From band-aids to pacemakers, J&J remains one of the world’s most prominent companies.

JPMorgan Chase & Co. (JPM)

JPMorgan Chase is one of the largest and most influential banking institutions globally, offering a range of financial services for both retail customers and major business operations. The bank rakes in well over $100 billion in annual revenues.

Procter & Gamble Co. (PG)

Procter & Gamble is a consumer goods company manufacturing a vast array of household products, including brands like Tide, Gillette, and Pampers.

S&P 500 vs. other indexes

The S&P 500 is just one among many indexes, including other S&P indexes (such as the S&P 1500). Let’s compare the S&P 500 against some other well-known indexes, all of which are essentially tradable via common and popular ETFs:

1. Dow Jones Industrial Average (DJIA)

The Dow Jones is one of the oldest indexes, consisting of 30 large, publicly traded, often dividend-paying companies. These are selected based on their reputation and significance in their industries.

Institutional investors tend to prefer the S&P 500 due to its extensive coverage, while retail investors have traditionally favored the Dow due to its simplicity and historical prominence.

2. Nasdaq

Nasdaq is a stock exchange known for its tech-heavy focus. Although it isn’t an index in the traditional sense, it includes several indexes, such as the Nasdaq Composite and the Nasdaq 100.

A given stock in the S&P 500 may also be in the Nasdaq Composite and Nasdaq 100. There's significant overlap. However, given its tilt toward established companies, the S&P 500 tends to boast a higher dividend yield.

3. Russell Indexes

The Russell indexes, including the Russell 1000 and Russell 2000, are widely used to measure the performance of small-cap U.S. stocks. These indexes use a predefined formula to decide which small-cap stocks to include.

In contrast, the S&P 500 uses a committee-based approach to select constituent companies based on factors like market capitalization, liquidity, and financial stability. It focuses on larger companies.

4. Vanguard 500 Fund

The Vanguard 500 Fund is a mutual fund designed to mirror the performance of the S&P 500. It invests its entire net assets in the index’s constituent stocks, holding each component with approximately the same weight as the S&P. (Vanguard offers similarly composed ETFs as well, such as the VOO.)

This fund allows investors to gain exposure to the S&P 500’s performance without purchasing each stock.

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