Last month we wrote an article about the Dow Jones Index - the DJIA and why it isn't a reliable measure of what might be happening with your investments. Although it has been operating since the 1800's, it only reflects 30 stocks and is 'share price weighted', which can provide some distortions to the picture of how investments ar working.
This month we are following up with some information on the more reliable S&P 500 which is the more common index that professional investors (and advisers) follow. Here are some imteresting things to know about this index:
The S&P500 - largely promoted as the best representative of the US market - comprises just 500 of the largest US companies out of about 17,500 US companies, of which about 6000 trade on stock exchanges.
The constituents of the S&P500 do not necessarily represent the largest 500 companies, with a committee relying on the following eight criteria to include a stock in the index:
It must be common stock of a corporation trading on the NYSE, NASDAQ, or Cboe; with the most of its assets and revenues in the US.
The company must not have more than one class of common stock (some current components with more than one class, like Google, are grandfathered).
The market cap of the company must be at least USD14.6 billion
At least 10% of the common stock must be publicly traded.
In the year prior to joining the index, the total value of shares traded must exceed the float-adjusted market capitalisation.
At least a quarter million shares must be traded in each of the 6 months prior to joining the index.
Earnings for both the most recent quarter and the sum of the last 4 quarters must be positive.
The shares must publicly trade for a year (on one of the above-mentioned indexes).
The S&P 500 is frequently used as a proxy for the value of the entire stock market, since the stocks it contains account for roughly 80% of the total value of stocks that are publicly available for trading.
The index was first introduced in 1957 (though earlier versions have been around since the 1920s). According to Inc.com, in 1965 companies lasted an average of 33 years in the index, dropping to 20 years by 1990, and forecast to drop to 14 years by 2026.
There are in fact 505 companies in the S&P 500 (because 5 companies - eg Alphabet/Google - have two classes of stock reflected in the index).
The top 10 companies (11 stocks since Alphabet/Google has two share classes in the top 10) account for nearly 32.5% of the index.
