The S&P 500 is a stock price index calculated and published by Standard & Poor's. It is composed of 500 companies selected from among U.S. listed companies...
The S&P 500 is a stock price index calculated and published by Standard & Poor’s. It is composed of 500 companies selected from among U.S. listed companies with large market capitalization and regardless of industry. The index is widely recognized as an indicator that reflects trends in the overall U.S. economy.
What is the background of its establishment? The S&P 500 was first launched in 1957, and its predecessor, the S&P 90 Index, was developed in 1923 by S&P, which itself was founded in 1906 and provides a wide range of financial services, including credit ratings and market analysis.
DevelopmentandPopularization: During the 1950s and 1960s, the S&P 500 established itself as a leading market index. In particular, it became a barometer of trends in the U.S. economy because it includes many of the largest companies listed on the New York Stock Exchange (NYSE) and the NASDAQ (NASDAQ).
What is the S&P 90 Index?
The S&P 90 Index was developed and published by Standard & Poor’s (S&P) in 1923. It was one of the earliest indices of major companies in the U.S. stock market and later became the basis for the S&P 500.
Background and Purpose of Establishment
In the early 1920s, the U.S. stock market was growing rapidly, and many investors needed an index to track overall market trends. At the time, there were several hundred companies listed on the New York Stock Exchange (NYSE), and analyzing individual stocks was time-consuming and labor-intensive. Therefore, S&P attempted to develop an index that could easily grasp the performance of the market as a whole.
Composition and Calculation Method
The S&P 90 Index was initially composed of 90 large-cap companies. These companies were selected based on criteria such as market capitalization, trading volume, and performance, and were drawn from a diverse range of industries representative of the U.S. economy. The index was calculated primarily using the average stock price method, which simply averaged the stock prices of the constituent companies.
What were the characteristics of the index?
Market Representativeness: The size of the index, 90 companies, was representative enough of the overall market at the time to be a reliable indicator for investors.
Transparency and credibility: S&P’s strict criteria for selecting and maintaining stocks ensured the transparency and credibility of the index.
Use as an investment benchmark: Many investors and fund managers used the S&P 90 Index to evaluate portfolio performance and analyze market trends.
Limitations of the S&P 90 Index
Limited number of stocks: The 90-company size did not fully reflect the overall market as compared to the later S&P 500.
Sector bias: The index may not accurately reflect the market as a whole if it is biased toward certain industries.
Evolution to the S&P 500
In 1957, S&P expanded the S&P 90 Index and introduced the S&P 500 Index as a more comprehensive market index. The objective was to more accurately reflect trends in the U.S. economy as a whole.
Major evolutionary points
Expansion of the number of stocks: By increasing the number of stocks from 90 to 500, we have improved the diversity and representation of the overall market.
Change in weighting method: The S&P 500 now uses a market capitalization-weighted calculation method to ensure that trends in large-cap stocks are reflected in the overall index.
Periodic Review: The S&P 500 is now structured to respond to market fluctuations and corporate growth through periodic reviews of its constituent stocks.
The Legacy of the S&P 90 Index
The S&P 90 Index was the cornerstone of the S&P 500 and played an important role in laying the foundation for modern equity indices; the success of the S&P 500 was based on the experiences and lessons learned from the S&P 90 Index, leading to the development of a more comprehensive and reliable market index.
Advantages of the S&P 500 Index
a. Broad Industry Coverage
The S&P 500 is comprised of 500 companies drawn from a variety of industries, including information technology, healthcare, financials, and consumer products. This diversity allows the index to serve as a more stable economic indicator without being dependent on a specific industry.
b. Market Capitalization Weighted
The components of the index are weighted based on market capitalization (share price x number of shares outstanding). This makes it easier for the index to reflect the trends of large companies that have a significant impact on the economy as a whole.
c. High liquidity
Companies in the S&P 500 are generally highly liquid and actively traded. This allows investors to buy and sell with ease and ensures efficient price formation.
d. Global influence
Because major U.S. companies operate around the world, the S&P 500 is also closely tied to global economic trends. This makes it an important indicator for international investors.
Notable features of the S&P 500
a. Investment Benchmark
Many mutual funds and exchange traded funds (ETFs) use the S&P 500 as their benchmark. This allows investors to evaluate their investment performance in comparison to the overall market performance.
b. Foundations of Passive Investing
In recent years, with the growing popularity of passive investments (investments that track the overall market), many index funds and ETFs that track the S&P 500 have been offered. They are favored by many individual investors because of their low cost and diversified investments.
c. Reliability as an economic indicator
The S&P 500 is also a reliable indicator of long-term economic growth. Historically, it has provided stable returns over time and is used as a barometer of economic health.
d. Periodic Review and Transparency
The components of the index are reviewed periodically and selected or changed based on criteria such as market capitalization, liquidity, and performance. This process is transparent and fair, thus maintaining credibility.
There are some limitations to the S&P 500.
Of course, the S&P 500 has some limitations
Biased toward the U.S. market: From a global perspective, the index covers only the U.S. market, which limits its ability to reflect economic trends in other countries.
Large-cap influence: As a market capitalization-weighted index, movements in certain large-cap stocks can have a significant impact on the overall index.
Sector bias: At certain times of the year, certain industries may have an excessive influence on the index.
Summary of this article
The S&P 500 is a leading stock index that provides a comprehensive view of trends in the U.S. economy and is trusted by many investors and economic analysts because of its history, composition, and dominance. By covering large companies in a wide range of industries and employing a market capitalization-weighted formula, the index accurately reflects the overall health of the economy. It also plays an important role as a foundation for passive investment, and is considered a useful indicator in long-term investment strategies. However, it is important to use it with an understanding of its limitations, as it is biased toward certain markets and sectors. Overall, the S&P 500 is an indispensable and important indicator in modern financial markets, and its influence is expected to continue.
