Updated on July 23, 2024
If you are interested in investments, you have certainly already heard about the S&P 500 index. It is one of the most important indexes. This ranking aggregates the stocks of the 500 most successful US companies and ranks them by market capitalization. And that’s why it’s so important to you as a marketer. Why? You can build a portfolio based on it. Or you can trade the index itself. Of course only through CFDs and ETFs. So let’s learn more about the index.
What is the S&P 500 Index?
So what exactly is the S&P 500 index? It is an abbreviation for Standard & Poor’s index. This name comes from the company that founded this ranking. It is a company that deals with analysis and research in the financial field. Primarily shares and bonds. It should also be noted that it is an American company. Therefore, the index also includes the 500 most successful American companies by market capitalization. In addition to this index, he is also responsible for ratings. It is a rating agency that gives investors feedback on how risky an investment in a given security is for them.
What is an index?
But let’s get back to the index as such. An index in general is a ranking that indicates the economic situation in a specific market or its segment. It can therefore be an index including shares of companies from a specific country, or only from a specific area of the economy. For example, shares of companies focusing on the automotive industry, healthcare, or cosmetics. The index can include either the shares of all companies operating in a given area, or only a selection of them. According to this, we divide indexes into aggregate and selective. The selection criteria then depend on the specific ranking. The most common are market capitalization and share price.
And what are such indexes actually good for? They show what the market situation is. This can be useful for investors who are deciding which companies to invest in. So, if you decide whether to become a shareholder of this or that company, you can use some of the indexes. It will help you orient yourself in a specific market. Of course, you don’t have to orient yourself only by them. Your own market analysis is also important. Either technical or fundamental. However, when trading indices, it is also necessary to regularly monitor the political and economic situation in the world.
S&P 500 index history
Let’s briefly imagine how the S&P 500 was created. The S&P 500 index had several predecessors, from which it gradually evolved. The history of the index dates back to 1923. That’s when the Composite Index was created. It included only dozens of titles and its creator was Henry Varnum Poor’s company called Poor’s Publishing.
It then merged with Standard Statistics in 1941. And then the Composite Index was followed by the S&P 90. As its name suggests, it included 90 companies. However, their number subsequently grew. And that was until March 1957, when his list reached 500 companies. Of course, those with the largest market capitalization. Hence the name S&P 500. The company initially updated this list weekly. It is currently being renewed constantly.
S&P 500 index – selection criteria
Just because a company makes it to the S&P 500 doesn’t mean it will stay there forever. The list of these corporations is constantly changing for the index. And that depends on whether they meet the criteria set by the index. If we talk specifically about the S&P 500, all the companies that are on its list are traded on the New York Stock Exchange (NYSE) and on the Nasdaq exchange. And that is why the S&P 500 is considered one of the most important indicators of the health of American companies. But be careful. Not just American. It can also be a company based elsewhere. However, it must be traded on the aforementioned exchanges.
Another of the objective criteria for selecting the S&P 500 is the company’s market capitalization. It must amount to at least 8.2 billion USD. And it is the market capitalization that then influences how much weight the given company has within the index. The S&P 500 is a weighted index. This means that each company is assigned a different weight based on market capitalization in the S&P 500. In addition to these objective indicators, the index publisher’s subjective preferences are also taken into account. For example, the S&P 500 index makes sure that not only the largest market capitalization is decided, but also diversity. The ranking should include companies from various industries in order to achieve representation of the entire US market. Not just one segment.
The value of the S&P 500 index
Now let’s see how the value of the S&P 500 is developing and whether we can calculate it ourselves. The value of the index is an important economic indicator. It shows the state of the economy of a given country or a specific economic segment.
Calculating the value of the S&P 500
And how is the value of the S&P 500 calculated? The S&P 500 index uses free-float stocks in calculating market capitalization. This means that it counts such shares that can be traded. If a company issues new shares, its market value is adjusted to reflect the current situation. Subsequently, the market capitalizations of all companies that are on the list of the S&P 500 index are added up. The result is then divided by the divisor. However, this divisor is secret and the publisher of the S&P 500 changes it as needed. So you cannot calculate this value yourself. What you can calculate, however, is the weight of specific companies within the index. It depends on their market capitalization. And this is exactly what will help you in making your investment decisions.
What is the value of the S&P 500?
*GRAF
Most indices have a growing character in the long term. It is no different in the case of the S&P 500 index. That is why investors often make trading decisions based on indices and their value. Whether they invest in individual stocks, ETFs or CFD indices.
S&P 500 records
If we were to look at the records that the S&P 500 index has achieved, the intraday traders will certainly be primarily interested in the records of daily increases and decreases. We would have to go a long way into the past for the highest daily loss. Specifically, until 1987. Its value was 20.47%. The highest daily increase then took place in 2008. Specifically, its value was 11.58%.
Let’s take a look at the year-to-year record losses and gains of the S&P 500 index. The highest year-to-year increase was recorded in 1954. That was 45.02%. On the contrary, we would look for the highest year-on-year decrease in 1931. This loss amounted to 47.07%. The years 1947 and 2011 are also interesting. No year-on-year increase or decrease is recorded in these years.
The S&P 500 Index and Investments
You may already have experience trading commodities, cryptocurrencies or currency pairs on forex. And maybe you are also a stock trader and you know that indices can also help you choose the right stock to invest in. Indexes can serve as a kind of template for your portfolio. Its core should be stocks that are safe to invest in, ideally blue chips. Blue chips are shares of companies that operate on the market for a long time and have already overcome several economic cycles. They are therefore rated as highly safe investments. They offer regular dividends to their shareholders. Often even growing. Such companies also belong to the list of companies in the S&P 500 index.
However, it doesn’t have to be specifically that you copy the entire portfolio of the index. It is enough for the S&P 500 index to tell you which companies are currently trending. Then you can check the tip yourself. Through your own market research. Every trader should have his own investment strategy. He should simply understand what he is doing. However, if you don’t want to spend your time analyzing the market and prefer to rely on the pros, this is also possible. You will find a number of mutual funds and ETFs that are inspired by the S&P 500 index.
Why invest in the S&P 500 index?
And why the S&P 500? The answer is clear. Whether you choose to invest through mutual funds or ETFs, the S&P 500 index will provide you with diversification of stocks in your portfolio and gradually increasing returns. As already said, indices in general are usually rising. Therefore, even ETFs that copy this stock ranking should grow gradually. Of course, there are no big fluctuations. Therefore, consider a longer-term investment.
And in terms of diversification and level of risk, the S&P 500 is ideal for trading. The issuer of the index does not only rely on the highest possible market capitalization, but also on its portfolio being diverse. It should thus correspond to the overall situation of the economic market. Not just a few segments. Therefore, you can rely on your portfolio being sufficiently diversified.
And this also results in a low level of risk. The S&P 500 index counts companies that have a high market capitalization. And at the same time, the S&P 500 is continuously updated. In addition, blue chips are also included. We can name, for example, the 9 largest companies that make up roughly 28% of the market capitalization of the entire S&P 500 index. Specifically, they are the companies Alphabet (formerly Google), Amazon, Apple, Berkshire Hathaway, Facebook, JPMorgan Chase & Co, Microsoft, Nvidia and Tesla.
The return (performance) of the S&P 500 index
Most sources report that the S&P 500 returns an average of 6-7% per year. So if we subtract inflation. But in general, there are a lot of question marks in calculating the performance of the S&P 500 index. The resulting number will depend on whether we include inflation in the return, whether we add dividends and also when we calculate these returns.
So if we look at the number that is generally quoted, 6-7%, it is not very high. That is why you should expect a longer-term investment. Trading indices, not only the S&P 500, but also others, is suitable for investors who are betting on safer and longer-term trading. It’s not for speculators. Although even they should base the core of their portfolios on safe investments.
How to invest in the S&P 500 index?
If you are wondering that you can invest in charts that show the economic situation in a particular market, you are thinking right. After all, if you start trading indices, including the S&P 500, you will not be trading a physical asset. Only with its derivatives. Therefore, it is not possible to own or sell a specific index. Only its derivative. Specifically CFDs and ETFs.
ETF
Let’s look at ETFs first . Unlike mutual funds, ETFs are traded on the stock exchange. We can think of ETFs as baskets of individual assets. If we are talking about stock ETFs, they will specifically be baskets of shares of selected companies. Therefore, if you trade with an ETF, you will not be trading with one specific stock, but with several stocks.
Specifically, stock ETFs copy the most recognized indexes. And they also include the S&P 500. Such ETFs have the same stock composition as the S&P 500 index. And there are also individual company variations. Therefore, if one company ceases to meet the conditions of the S&P 500 index, it is replaced by another. And it works exactly the same for stock ETFs that copy this index.
Of course, you can also create your own stock portfolio based on the S&P 500 index. However, for a small trader, it is too time-consuming, and above all, financially demanding. At least with some brokers. That’s why ETFs exist. The cost of investing in ETFs is low. And also essentially jobless. You don’t have to constantly monitor the situation. An ETF will do this for you. And that includes stock updates of individual companies.
CFD
When trading CFD contracts, you do not become a shareholder of any company or the owner of any commodity. But you can make money by speculating on the price development of the given asset. And it is the same with CFD indices. So, through CFDs, you will speculate on how the price of the S&P 500 index will develop. Or any other index. The index will therefore only serve as the underlying asset for the given CFD. Specifically, a CFD contract is an agreement between you and the broker, where you both undertake to pay the other the difference between the purchase and sale price of the CFD. Depending on whether your speculations are correct, you will either make money or lose money on CFDs.
CFD trading is more suitable for intraday investors. Conversely, CFDs are not suitable for long-term investments. It is also important to note that when trading CFDs you will be trading with leverage. This means it is a risky investment. Financial leverage will multiply your earnings and losses from CFDs. You can earn money fast. On the other hand, you can also quickly lose your invested money.
Is it possible to make money when its price drops?
It may sound like a paradox, but you can also profit from the decline of the S&P 500 index. And that is precisely when investing in CFDs. With CFDs, you can speculate not only on the rise, but also on the fall of the price. In that case, you will be “selling” an asset that you do not actually own. But that’s what CFD is all about. And if you estimate the decline in the price of the index correctly, you can make money.
S&P 500 – Final Summary
Finally, let’s summarize everything important that was said in the text. The S&P 500 is an index that gathers companies with high market capitalization. But only those that are traded on the New York Stock Exchange. However, the list of these companies changes as a result of whether they meet the conditions set by the issuer of the S&P 500 index.
And what will the S&P 500 index do for you as an investor? It can help you with your investments. Either when choosing a share of a specific company. Or you can invest in its derivatives. Specifically into ETFs and CFDs. And when choosing between ETFs and CFDs, think about whether you are more of a speculator or a long-term investor. CFDs are more suitable for intraday traders, while ETFs are more suitable for long-term investors.
