S&P 500 Index: An Overview

wall-street

On the basis of the market capitalization of the 500 large corporations with common stock listed in the New York Stock Exchange (NYSE) or National Association of Securities Dealers Automated Quotations (NASDAQ) S&P 500 index was made. S&P 500 is the abbreviation of Standard and Poor’s 500, often called just S&P. it’s not like other indices being traded in the United States, like NASDAQ composite index, as its constituency is diverse and it differs in weighing methodology. It is usually considered as the best representor of U.S. stock market and the only index most commonly followed. Some companies in the list of S&P 500 includes 3M Company, Abbot Laboratories, AbbVie, Accenture plc and etc.

The inception of S&P 500 was in 1957. The methodology to construct the index or to select any company for the index consist of five steps. First is Universe, states that company must be of U.S. constituency. Second is based on the market cap, and eligible company must be with market cap of $5.3 Billion or greater. Next says that at least 50% of the outstanding shares must be available for trading. Fourth states that company’s earnings reported in the recent quarter must be positive, and most recent four quarters earning when summed should result into positive earnings. Last methodology is that company should consist of the common stock with the price reasonable and they must be highly tradeable, liquidity is adequate and the prices are reasonable.

There are cases that companies were removed from the index due to various reasons. This has also happened that the removed companies were added back to the index after some years. One of the reason of the removal and most common one is mergers and acquisitions. Though it is mandatory for an organization to maintain $5.3 billion market cap but it has never happened that the company is removed merely due to a little decrease in the market cap, unless some other major factors doesn’t compel S&P Dow Jones to remove the company.

Richard Cox

Richard Cox has a PHD in Macroeconomics and has taught the subject at the university level. He writes for several internet news outlets, including: CNBC, TheStreet.com, NASDAQ, and the Motley Fool.

Follow Richard on Twitter: @RCox_

One Comment

Leave a Reply

Your email address will not be published. Required fields are marked *