Stock Prices: S&P 500

Definition


What is the S&P 500?

The S&P 500 is a stock index compiled by Standard and Poor's, a division of The McGraw-Hill Companies, Inc. Since 1957 the S&P 500 has been made up of stocks from 500 companies selected by Standard & Poor's Index Committee. The index is made up of leading U.S. companies in important industries in various U.S. markets. The index is weighted by the size of the companies, and is designed to reflect the composition of the U.S. economy. Other attributes of the companies in the S&P 500 are that their stocks are widely traded and are considered relatively stable. Two other prominent indexes are the Dow Jones Industrial Average and the Russell 2000. The Dow Jones Industrial Average (DJIA) is one of the oldest and most watched stock indices in the world. The DJIA is made up of 30 large U.S. corporations, and unlike the S&P 500, the DJIA is price weighted. The Russell 2000 is one of the most watched indexes used to measure the performance of U.S. small company stocks. The Frank Russell Company constructs the index by selecting the 3,000 largest companies headquartered in the U.S., and then removing the 1,000 largest companies, with the remaining stocks becoming the Russell 2000 index.

The S&P 500 provides a number of valuable functions for investors and economic observers. Many people who invest in stocks diversify their portfolio against company and sectoral risk by buying stock through mutual funds (funds that pool investment monies and buy a diverse portfolio of stock). Since investors around the world consider the S&P 500 to be the standard representative of the U.S. market, the quality of stock mutual fund managers can be assessed by comparing the performance of their mutual funds to that of the S&P 500. Since it is difficult to repeatedly outperform the S&P 500, there are now more than 400 stock mutual fund companies, managing $700 billion in investments, that offer lower management fees by simply mimicking the S&P 500. Finally, the S&P 500 is a component of the Conference Board's Index of Leading Economic indicators.

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