What is the S&P 500?
The S&P 500, also known as the Standard & Poor’s 500, is a type of stock index. A stock index is a group of stocks whose performance is supposed to represent all or part of a stock market.
The S&P 500 is made up of 500 different companies, and its performance is supposed to represent the performance of the US stock market.
Each company in the S&P 500 is considered large in size. Size is determined by the company’s market capitalization, or more commonly called market cap.
You calculate market cap by multiplying the company’s share price by the # of shares outstanding. If the company’s market cap is at least $6.1 billion, it’s large enough to be considered for the S&P 500. The stock of a company this size is called a Large Cap Stock. Therefore, only large cap stocks can be in the S&P 500.
Also, almost every industry is represented in the S&P 500 index.
The value of the S&P 500 is calculated by using a formula that takes into account each company’s market cap. Therefore, the S&P 500 is a Market-Weighted Index.
Most investors believe the S&P 500 most accurately reflects the performance of the US stock market. As a result, many investors compare its performance to their own stock portfolio. If your stock portfolio performed better than the S&P 500, you beat or outperformed the market. If your stock portfolio performed worse than the S&P 500, you underperformed the market.
Comparing your portfolio’s performance to an index’s performance is called Benchmarking to that index.
There is one major limitation in using the S&P 500 as a benchmark. Since it contains only large company stocks, if your portfolio has small to medium sized company stocks, it won’t be a good comparison because your portfolio contains different types of stock
Remember, the S&P 500 is considered the best index to gauge the performance of the US stock market. But make sure you know the limitations when using it as a benchmark.