The origins of the S&P 500 Index go back to 1923, when Standard & Poor's introduced a series of indices which included 233 companies and covered 26 industries. The Index as it is now known was introduced in 1957. Since 1968, the Index has been a component of the U.S. Department of Commerce's Index of Leading Economic Indicators. Now published by the Conference Board as the Composite Index of Leading Indicators, that widely followed index is used to signal potential turning points in the U.S. economy.
Distribution of the S&P 500 Index
Bridge Information Systems is the primary calculator and disseminates S&P 500 values every 15 seconds during the trading day. Bridge also transmits Index values to the Chicago Mercantile Exchange, where S&P 500 futures trade, and the Chicago Board Options Exchange, home of S&P 500 options. The exchanges in turn distribute the Index values to numerous quotation vendors. This ensures the widest possible means of distribution. The S&P 500 is reported daily in The Wall Street Journal, The New York Times, U.S.A. Today, and virtually every major regional and local newspaper in the U.S.
S&P Index Committee
The S&P Index Committee is responsible for establishing Index policy. The management of the S&P 500 Index is totally objective and independent from S&P's other business operations and interests. Companies are not removed from or added to the Index because of anticipated future stock price performance. Rather, they may be removed because of mergers, acquisitions, restructurings or bankruptcy filings. The decision to add a company is based upon market value, economic sector, industry group representation, stock liquidity, ownership and operating/financial condition. Minimizing turnover of the composition of the S&P 500 Index is a primary consideration.
Comparison to the Dow Jones Industrial Average
The Dow Jones Industrial Average is the oldest indicator and probably the most well-known gauge of U.S. stock market performance. The DJIA is composed of 30 large capitalization, blue-chip stocks and measures the performance of a relatively small sector of the market. It is price weighted rather than capitalization weighted. As a result, a $1 move of a given stock price has the same effect on the DJIA as a $1 move in any other stock price.
The Index is market value-weighted (shares outstanding times stock price); each company's influence on Index performance is directly proportional to its market value. The daily Index values which are reported in the media are exclusive of dividend income, i.e., they reflect only price action of the underlying component stocks. Standard & Poor's does, in fact, calculate a separate total return index which recognizes dividend reinvestment. It is the total return which is generally cited when comparing Index performance against the performance of mutual funds or other investments.
The S&P 500 does not contain the 500 largest stocks; rather, it contains leading companies from leading industries which may include relatively small companies. The Index represents a broad cross-section of the U.S. equity market, including common stocks traded on the New York Stock Exchange, The American Stock Exchange and the Nasdaq National Market System. S&P identifies important industry sectors within the U.S. equity market, approximates the relative importance of these sectors in terms of market capitalization and then allocates a representative sample of stocks within each sector to the S&P 500. There are 10 economic sectors within the Index: Energy, Consumer Discretionary, Consumer Staples, Financials, Health Care, Industrials, Information Technology, Materials, Telecommunication Services and Utilities. Further, each sector is divided into industry groups; there are currently more than 100 industry groups in the Index.
Last Updated: 9/23/2012 10:05:00 PM