How Is the S&P 500 Calculated?

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The Standard & Poor's 500 index has become one of the most important indicators for investors in the U.S. stock market. The index is quoted daily in the financial press and is closely followed on financial news networks as it ticks up and down throughout the business day. Because it follows 500 stocks instead of the 30 large companies gauged by the older Dow Jones industrial average, it is considered a more accurate and inclusive indicator of the overall state of the stock market.

History

  • The S&P 500 was created by the Standard & Poor's company in 1957. It was considered a more up-to-date and comprehensive market indicator, as emerging communications technology allowed the index to be followed by investors and brokers as it changed throughout the day.

Selection

  • A group of Standard & Poor's directors selects the companies to be included in the index. The index includes companies of various sizes, in different industries and sectors. The companies must be publicly traded, and non-U.S. companies are generally excluded, with a few exceptions.

Market Capitalization

  • The first step in calculating the value of the S&P 500 is to calculate the overall value for each company. This is done by multiplying the number of publicly traded and outstanding shares by the share price. The number that results is the total market capitalization or market value of that company.

Weighting

  • The market value of each company is divided by the total market capitalization of all 500 companies. The percentage that results is the weight of that particular stock on the movement of the entire index. For example, a company with 1 percent weighting and whose share price increases 10 percent in a single day would increase the S&P Index .1 percent on that day.

Index Divisor

  • Standard & Poor's uses a number known as the index divisor for the calculation of the index value. The market capitalization of all companies in the index is divided by the divisor to arrive at the index value, which is recalculated by a computer algorithm every 15 seconds while the markets are open. The index divisor can account for changes in market capitalization created by stock splits, dividend payments and other adjustments.

References

  • Photo Credit Kick Images/Photodisc/Getty Images
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