A Beginner's Guide to the S&P 500 index
If you're seeking to increase the diversification of your portfolio, index trading could be an avenue that's well worth exploring. It allows you to invest in a sector as a whole, or in a selection of companies within that sector. This can help reduce your risk because the outcome is less reliant on the performance of an individual stock.
And the S&P 500 index is one of the most popular choices for traders around the world. Of course, before you start to make any decisions regarding your investment strategy, you need to do your research. It requires a firm understanding of the make-up of the index, how it's weighted, and the factors that can impact its performance.
FXCM will cover all of that for you right here, so read on to find out more about the S&P 500.
What is the S&P 500?
S&P is an abbreviation of Standard and Poor's, which is the credit rating agency that launched the index back in 1957. It features 500 of the major publicly traded companies in the United States of America. It is a float-adjusted, market-capitalisation-weighted index and was the first of its kind in the US. At the end of 2021, it was estimated that $15.6 trillion was benchmarked to the index.
Due to its sheer size and composition of major companies, it is regarded as the preeminent gauge of the US stock market. And because of the States' position as an economic powerhouse, the S&P 500 index can also be used to measure the status of the stock market on a global scale.
What companies are in the S&P 500?
To be considered eligible for the index, all S&P 500 companies must be US firms, first and foremost. They also require an unadjusted market cap of at least $14.6 billion, plus a float-adjusted market cap of at least 50% of the unadjusted minimum market cap threshold.
As you might expect, the S&P 500 index is made up of some of the world's largest firms. To illustrate the point, the top 10 constituents by index weight include the likes of:
- Johnson & Johnson
- Exxon Mobil
In terms of an industry breakdown, more than a quarter (26.4%) of S&P 500 companies are from the information and technology sector. Healthcare firms – the biggest of which being UnitedHealth Group and Johnson & Johnson – make up 15.2% while financial companies including Berkshire Hathaway account for 11.6%.
Is the S&P 500 equally weighted?
The S&P 500 is not equally weighted. It is market-cap weighted, which means those companies with the greatest market capitalisation – such as those listed above – are given greater weight. The weighting for an individual S&P 500 company is calculated by figuring out the market cap of that particular firm (information which is usually publicly available) and dividing it by the aggregate market cap of the entire index.
What affects the value of the S&P 500 index?
As with any index, several factors can influence the S&P 500 share price. These include:
- Constituent performance: Major movements in the share price of companies within the index can have a significant impact – especially if that company is one of Apple, Microsoft, Amazon or any of the others that hold a larger weighting.
- Monetary policy: Most traders following S&P 500 news will closely monitor any updates and announcements from the Federal Reserve. For example, sudden changes in interest rates can have major consequences and lead to increased volatility across the index.
- Industry trends: As mentioned above, companies in the IT, healthcare and financial sectors make up more than half of S&P 500 stocks. So, any major developments across those industries – regulatory changes, for example – can have a telling impact.
- News events: The S&P 500 index tends to reflect the state of both the US and, by extension, the global economy. Major occurrences such as The Great Recession of 2007-09 and the Covid-19 outbreak in 2020 saw the index fall sharply in value. Any similar seismic shifts in the future are always likely to send shockwaves through the index and its constituents.
- Changes to the index's composition: If a company is added to the S&P 500, the price often experiences a lift. This is because mutual funds need to purchase the stock of the new constituent in order to reflect the index as accurately as possible.
How to invest in the S&P 500
You can trade the index in many different ways. One such method is by investing directly in the S&P 500 companies themselves. This will mean you own the underlying asset and the outcome of your trade will rest solely on the performance of that individual stock, rather than the movements of the index as a whole.
One alternative is to invest in the S&P 500 via contracts for difference (CFDs). These act as an agreement between you and a broker to pay the difference in value between the S&P 500 share price when you open the position and when you close it. Trading via CFDs means you can speculate on future performance – both bearish and bullish movements – without taking ownership of the underlying asset.
S&P 500 opening times
Typical trading hours for the S&P 500 index are 9:30am-4:00pm Eastern Standard Time. However, some brokers will offer the opportunity to trade 24/5, depending on the product.
Is the S&P 500 a good investment?
There are no guarantees when it comes to making investment decisions. But the S&P 500 index does offer plenty of benefits that make it a popular vehicle for traders the world over. These include:
- Volatility: Many traders keep a close eye on the volatility index (VIX) and the S&P 500 tends to be more volatile than other major indices, such as the Dow Jones Industrial Average. This means there is scope for increased profitability on bullish days.
- News coverage: As one of the most popular indices, heavily linked to the world's largest economy and featuring some of the biggest companies across the globe, there will always be plenty of relevant news and data regarding the S&P 500 index. This wealth of information can help inform your research and shape your trading strategy.
- Liquidity: The size of some of the index's major constituents means the associated assets are always in high demand, with traders all over the world looking to buy or sell regularly, and in high volume.
- Diversification: Investing in an index like the S&P 500 means naturally adding greater variety to your portfolio because it covers companies across a wide range of sectors.
Can you lose money on the S&P 500?
As we've already made clear, there are pros and cons to every trading decision you make. There are always risks and rewards attached – something that is especially relevant when you consider the volatility of the S&P 500 index.
When using leverage to trade via CFDs, there is an opportunity to magnify your profits. But, on the other hand, your losses will be amplified if the markets move against you.
As with any investment, you must monitor S&P 500 news closely, do your research, and conduct thorough analysis before making any moves. There is always a risk that you could lose money on the S&P 500, but the best traders will find a way to mitigate against that as best they can.
Trade the S&P 500 index with FXCM
FXCM is a leading broker that allows you to trade S&P 500 stock without having to take ownership of the underlying asset. You can do this with CFDs and our flagship Trading Station provides the perfect platform for you to operate from.
You can open a free demo account to build up your experience before exposing yourself to real market conditions. And then when you think you're ready, it's perfectly simple to set up your account and start trading the S&P 500 index.
FXCM Research Team
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