[Economics Basics] What Is the S&P 500 Index in the US Stock Market?
2 min read · · Korean original
Contents 4
What is the S&P 500 index? It is a market-capitalization-weighted index of the 500 largest publicly listed companies in the United States. It is known as the most suitable measure of US stocks. Other indexes that benchmark the US stock market include the Dow Jones Industrial Average (the Dow 30) and the Russell 2000.
Composition of the S&P 500 Index
A company's market capitalization is calculated by multiplying its current share price by the number of shares outstanding. The S&P index counts only shares that can be publicly traded, and it reflects mergers or the issuance of additional shares. In this way, the S&P 500 index calculates the market capitalization of the 500 largest listed US companies based on their publicly traded shares.
Example of an S&P 500 Market Cap Calculation
The S&P index can be calculated by dividing individual market caps by the total market cap. This lets us gauge how much influence a particular stock has on the overall stock market. Here is how Apple's index weight is calculated.
- In Q4 2018, Apple Inc. reported 4,801,589,000 shares at a price of $148.26.
- Apple's market capitalization is $711.9 billion (4,801,589,000 * $148.2).
- The market capitalization of the S&P 500 is $23 trillion, which is the combined market cap of all the stocks included in the index.
- Dividing $711.9 billion / $23 trillion gives Apple an index weight of 3%.
S&P 500 Index vs. the Dow Jones Average
While the S&P 500 is generally the index preferred by institutional investors, the Dow Jones Industrial Average is the one preferred by individual investors. Institutional investors believe the S&P 500 reflects the US stock market more accurately because it gives more weight to companies with larger market caps.
The Dow Jones Average, on the other hand, gives more weight to companies with higher share prices. In the US market, weighting by market capitalization is more common than weighting by price.
Limitations of the S&P 500 Index
The limitations of a market-cap-weighted index like the S&P show up when stocks become overvalued. If a heavily weighted stock rises while overvalued, it inflates its weight across the entire index.
