The S&P 500 explained: what it holds and why it matters

The S&P 500 is a stock index that tracks roughly 500 large companies listed in the United States. It is the most widely used yardstick for the US stock market, and when someone says "the market was up today," they very often mean this index. It is also the universe of companies covered on StocksXray, so it helps to know exactly what it is and what it is not.

What the index is

The S&P 500 is maintained by S&P Dow Jones Indices. Its current form, with 500 stocks, dates to 1957. A committee, not a formula alone, decides which companies are added or removed, and the rules are published by the index provider.

The index holds about 500 companies, though the number of tickers is slightly higher because a few companies have more than one class of shares included. Companies come from all 11 sectors of the economy under the Global Industry Classification Standard (see GICS sectors explained).

It is not simply "the 500 largest US companies." Size matters, but the committee applies several tests.

Who gets in

The criteria are set by the index provider and are updated from time to time, so check the current methodology for exact numbers. In general, a candidate must:

• Be a US company, judged by factors such as where it is domiciled, where its assets and revenues are located and where it files its reports.
• Meet a minimum market capitalization, which the provider adjusts from time to time.
• Have enough shares available to the public (a minimum free float) and enough trading volume to be easily bought and sold.
• Be profitable on a GAAP basis: positive earnings in the most recent quarter and a positive sum over the last four quarters.

The profitability rule can keep a large but unprofitable company out of the index until its earnings turn positive. Companies leave the index when they are acquired, shrink well below the standards or no longer meet the criteria.

How it is weighted

The S&P 500 is float-adjusted market-cap weighted. Each company's weight is its market value, counting only shares available to the public, divided by the total for all constituents. A company worth ten times as much as another has ten times the influence on the index's daily move. The mechanics of this method are explained in what is a stock index.

Example (illustrative numbers)

Imagine a simplified five-company version of the index:

If A rises 3% and every other company falls 1%, the index changes by 0.40 x 3% plus 0.60 x (-1%), which is +1.2% - 0.6% = +0.6%. The index rose even though four out of five companies fell, because the biggest company dominated. Real life is less extreme, but the same logic applies: the largest members can pull the index around.

How to read it

• A benchmark. Fund managers often compare their results with the S&P 500 to judge whether they added value.
• A rough gauge of large-company sentiment. Because it covers a large share of total US stock market value, it moves with the broad mood.
• A basis for funds. Many index funds and ETFs aim to track it (see what is an ETF).

Rules of thumb: the index's level is not meaningful in itself, and percentage changes over longer periods say more than one day's move. Headline numbers are usually price-only; total return, which includes dividends, is higher over long periods.

Common mistakes and limits

• Assuming it equals the whole market. It excludes small and many mid-sized companies, as well as foreign stocks, bonds and other assets. See large, mid and small-cap stocks for the other size groups.
• Assuming it is evenly spread. Because of cap weighting, the biggest companies can make up a meaningful share of the index, and the sector mix shifts over time. Look up the current weights from the provider rather than assuming.
• Assuming "diversified" means "safe." The index has experienced large declines in the past, and it can fall sharply over months or years.
• Ignoring survivorship. Poor performers eventually fall out while successful companies stay or enter, so the index's history reflects that churn.
• Comparing it with other indexes carelessly. The Dow Jones, Nasdaq Composite and Nasdaq 100 are built differently and can tell different stories on the same day.

Where to see it on StocksXray

StocksXray covers the S&P 500 universe, and the S&P 500 index page lists the members. The X-Ray Score ranks each metric against companies in the same sector rather than against the whole index, which keeps comparisons like-for-like. See the methodology for how.

Key takeaways

• The S&P 500 tracks about 500 large US companies chosen by a committee under published rules.
• It is weighted by float-adjusted market value, so the largest companies influence it most.
• Eligibility includes size, liquidity, a US-company test and positive GAAP earnings.
• It is a useful benchmark but covers only part of the market and can be concentrated.
• The headline level is a price index; dividends add to total returns.

This article is educational and is not investment advice.