Because the index considers various other factors, the list of the top 500 corporations in terms of market capitalization in the United States is not exhaustive. Despite this, the performance of the S&P 500 index is considered to be one of the finest measures of how well major American stocks are and, by extension, the success of the stock market as a whole. The first step in determining the weighting of each component of the S&P 500 is to determine the overall market capitalization of the index. This is accomplished by summing the individual market capitalizations of each firm included in the index.
To briefly recap, a firm's market capitalization is arrived at by multiplying the current stock price by the total number of issued and outstanding shares in the company. The S&P 500, as well as the market caps of individual firms, are routinely published on financial websites. This eliminates the need for investors to compute the values themselves. A firm's market capitalization is divided by the total market capitalization of the index to determine that company's weighting in the index. The entire market capitalization of the index is the starting point for the calculation.
Additional S&P Indices
The former measures the performance of firms in the mid-cap area, while the latter measures companies in the small-cap region. An index known as the S&P Composite 1500 includes the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600. Together, these three indices encompass ninety percent of the total market capitalization in the United States.
Construction of the S&P 500 Index
When determining market capitalization, the S&P only considers a company's "free-floating shares," which are available for trading to the general public. The S&P revises each firm's market capitalization to consider any recent corporate mergers or share offerings. Each firm's entire adjusted market capitalization is added together, and the resulting number is then divided by a divisor to arrive at the value of the index. The S&P considers the divisor to be confidential business information. Hence it is never made available to the general public.
Because it is comprised of the 500 biggest publicly listed companies in the United States, the S&P 500 is one of the most often referenced American indexes. The S&P 500 is a float-weighted index, a sort of capitalization weighting. Companies' market caps are modified based on the number of shares available for public trading. The emphasis of the S&P 500 is on the large-cap sector of the U.S. market.
Competitors in the S&P 500 Index
S&P 500 vs. DJIA
The Dow Jones Industrial Average is yet another standard measure used in the stock market in the United States (DJIA). Given its depth and breadth, the S&P 500 is often the favored index of institutional investors, but the DJIA has traditionally been linked with substantial stocks from the perspective of ordinary investors. This is due to the S&P 500's depth and breadth. When compared to the Dow Jones Industrial Average, which only includes 30 companies, institutional investors believe that the S&P 500 is a better indicator of the state of the U.S. equities markets since it contains 500 companies rather than just 30.
S&P 500 vs. Nasdaq
The Nasdaq is a worldwide electronic market where securities may be bought and sold. A number of equity market indexes track performance based on the inclusion of companies that are traded on the Nasdaq. It is important to remember that particular stock in the S&P 500 Index may also be included in one or more of the several Nasdaq indexes. The Nasdaq 100 Index, which consists of 100 of the biggest and most frequently traded common shares listed on Nasdaq, is one of the Nasdaq stock indexes that receive the greatest attention from investors.
S&P 500 vs. Russell Indexes
Standard & Poor's is responsible for developing several different indexes, one of which is the S&P 500. Unless otherwise specified, both the Standard & Poor's and the Russell index family are market-cap-weighted indexes. This is a similarity between the two index families (as in the case of equal-weighted indexes, for example).
Limitations of the S&P 500 Index
When stocks in an index become overpriced, which means they climb higher than their fundamentals support, this is one of the limits of the S&P and other market-cap-weighted indexes. This is also a limitation of other market-cap-weighted indexes. When a stock has a large weighting in an index and is also overpriced, that stock tends to drive up the total value or price of the index. This may happen even when the index itself is undervalued.
