The Standard and Poor 500 is a stock market index that essentially represents the entire US stock market. It is a combination of the 500 largest stocks on the New York Stock Exchange and as such, the index represents the profit and risk potential of the largest companies.
What is the S&P 500?
How does the S&P 500 Index work?
As a representation of the entire stock market, the S&P 500 amalgamates the market capitalization of the five hundred largest companies to determine the overall value of the stocks sold out by a company to its shareholders. To truly represent the economy, the S&P 500 includes companies from different industries including consumer goods, telecoms, financial services, technology, utilities, industrial and materials sector. By including companies from these diverse sectors, the index is able to give a more accurate indication of the performance of the US economy. Investors use this index as an economic indicator to determine the most appropriate time to buy or sell stocks.
The S&P 500 Vs. Other Stock Market Indices
The S&P 500 should not be confused with the Dow Jones Industrial Average. The latter is also a market index put is a representation of the stock prices of the thirty largest companies in the U.S. Although the S&P 500 comprises of the top 500 companies with the largest stock cap, some investors across the world reference the Dow Jones as their market indicator.
What about the NASDAQ? The S&P 500 is also different from the NASDAQ in that the NASDAQ has a greater representation of companies in the technology industry. In spite of the subtle differences between the various stock market indices, the stock prices represented by each of the indices move along in the same direction majority of the time. This way, if you choose to use the S&P 500 as your predominant economic indicator, you do not have to keep up with the other indices.
All the companies included in the Standard and Poor index have similar characteristics:
In addition to being U.S. companies, all the companies in the index have stocks that are worth at least $4 billion and the public must hold at least half of these stocks. To be included in the index, a company must have stable financial health demonstrated by positive earning in four consecutive quarters. Each of the companies’ stock is worth at least $1 per share and is listed on the NASDAQ or NYSE.
How are the companies selected?
Many traders who first come across the S&P 500 are curious to know how the companies included in the index are selected. How are they evaluated? A group of analysts and financial experts working with Standard&Poor usually select the companies to include in the index. Each company’s stock value and market value is evaluated to determine the companies that have the greatest values in their specific industry.
Other than the S&P 500, the S&P 600 is another well-known index. It includes markets with smaller capitalization of $300 million to $2 billion. The S&P 400 comprises of middle-sized (mid cap) companies with capitalization in the range of $2 billion and $10 billion.
Trading binary options with an index such as the S&P allows traders to keep track of the overall market. So, instead of monitoring just one commodity or stock, you can identify the performance of each asset to make short term forecasts on the price movements of a specific underlying asset.