How the S&P 500 Leads to Simple Success for Everyday Investors

An image to accompany a story about the S&P 500 index Illustration by NextAdvisor
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The S&P 500 is a stock market index that tracks 500 publicly traded U.S. companies. It is a highly regarded barometer of the overall stock market and as investors, it’s important to understand its role in your portfolio

The S&P 500 stands for Standard and Poor’s Index. It’s weighted by market cap which means that the larger the company, the more sway it has on the index.

Investing in hundreds of companies makes sense for your portfolio. That’s why investors should be investing in index funds, such as ones that track the S&P 500. That way, your money is protected and diversified should an individual company or sector take a downturn. There are other indexes as well, like the Dow Jones Industrial Average.

“The S&P is one of the best benchmarks of large-cap U.S. publicly traded companies as it has a wide representation of companies that fall in this category of ‘large cap’ stocks,” says John Hagensen, owner and founder of Keystone Wealth Partners, a wealth management firm. 

Where you put investment money matters, and the S&P 500 has a lot to do with it. Here’s what it is and how it impacts your money.

Which Companies Are In the S&P 500?

There are a total of 500 companies and 505 stocks that make up this index. Companies include Apple, Microsoft, Amazon, Facebook and Tesla, to name a few. These large companies make up 80% of the overall value of the stock market. 

Other companies include JPMorgan Chase, Johnson and Johnson, and Berkshire Hathaway.

How to Invest in the S&P 500

Investing in the S&P 500 is a good way to get a diverse investment portfolio. You can buy into the S&P 500 by buying mutual funds or ETFs that track this index. This helps diversify your money among these hundreds of companies.

Pro Tip

Use the S&P 500 as a measurement tool for investing. Investing in low cost index funds that track this index is a great way to diversify your portfolio.

These types of investments are also low cost, meaning you can get into these investments at virtually no cost. Over time, the S&P 500 can provide strong returns for your portfolio with small effort on your part. You can open up a low-cost index fund at a brokerage firm. See NextAdvisor’s list of the best online brokerages.

S&P 500 vs. Dow Jones Industrial Average

While the S&P 500 and the Dow Jones Industrial Average are both indexes you can trade on, they’re not created or managed the same way.

The Dow Jones tracks about 30 companies while the S&P 500 has 500 companies. Because of this, the S&P 500 has a larger range of the overall market. 

S&P vs. Russell Indexes

The Russell Indexes are a collection of indexes, and each one has its own specific tracking and measuring systems. For instance, the Russell 2000 tracks 2,000 of the smallest U.S. publicly traded companies. The Russell 3000 tracks 3,000 of the largest U.S. publicly traded companies. 

While they both use market capitalization-weighted methods to determine the weight of each stock on their indexes, how companies get added is a bit different.

“The Russell indexes add various companies through meticulous formulas and calculations, while the S&P 500 uses a committee of individuals to decide which companies to include,” Hagensen says. “This explains why there are some companies who have large market caps but are not included in the S&P 500, because the committee can elect to not include companies based on their discretion.”

The type of companies on the Russell Indexes and the Dow Jones Industrial Average have their own set of requirements. Because of this, they might not be as representative of the U.S. stock market but rather, different sectors or industries.

Limitations of the S&P 500 Index

Remember that the S&P 500 gives the most weight to the companies with the most market capitalization.

Hagensen says the top four companies in the S&P 500 represent over 20% of the total value of the index. That’s a significant amount. That means 496 other companies represent the other 80%. This shows that the bigger the company is, the more power they have in controlling the index. The lower the market capitalization, the less weight they have on the overall S&P 500.