Course 104: Understanding Market Indexes
The S&P 500, Part 2
In this course
1 The Dow
2 Calculating the Dow
3 The S&P 500
4 The S&P 500, Part 2
5 Other Indexes

Although it's usually referred to as a large-cap index, the S&P 500 does not just consist of the 500 largest companies in the U.S. The companies in the index are chosen by a committee at Standard and Poor's, which meets monthly to discuss possible changes to the list. They choose the companies on the basis of "market size, liquidity, and group representation." New members are only added to the 500 when others drop out because of mergers or (less commonly) a faltering business.

Some types of stocks are explicitly excluded from the index, including real-estate stocks and companies that primarily hold stock in other companies. For example, Warren Buffett's holding company Berkshire Hathaway BRK.B isn't included, despite having a market value among the top 30 for U.S. companies. Until recently, the index included a handful of foreign stocks such as Royal Dutch Petroleum RD, but the index is exclusively American today.

Size matters with the S&P 500. Because the companies chosen for the S&P 500 tend to be leaders in their industries, most are large companies. But the largest of the large-capitalization stocks have a much greater effect on the S&P 500 than the smaller companies do. That's because the index is market-cap weighted, so that a company's influence on the index is proportional to its size. Thus, Microsoft MSFT and General Electric GE,with the two biggest market caps among U.S. companies, each accounted for more than 3% of the S&P 500 as of this writing. In contrast, other smaller companies can account for less than 0.1% of this index.

Next: Other Indexes >>


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