Stock Market 101 : What is the S&P 500 and what does it represent?

The S&P 500 is a stock market index that consists of 500 large-cap companies from a diverse range of industries. The index is owned and maintained by Standard & Poor's (S&P), which is a division of McGraw-Hill. S&P 500 is part of two larger indices, S&P 1200 and S&P Global 1500.

All of the corporations included in the S&P 500 are traded in the two largest US stock markets - the New York Stock Exchange and the Nasdaq. The 500 corporations in the S&P are seen as leaders in their industries and therefore are among the most commonly watched stocks in the US stock exchange. Some companies included are Exxon Mobile, AT&T, Microsoft and Procter & Gamble.

It was created on March 4, 1957 as an expansion of the pre-existing S&P 90. Advancements in computer technology at the time made the index possible by calculating and disseminating the index in real time. Since its creation, the S&P 500 index is often used as a benchmark to indicate the future of the market and the US economy. At one time, the Dow Jones Industrial Average (DJIA) was the most notorious index for U.S. stocks, but because the DJIA contains only 30 companies, most people agree that the S&P 500 is a better representation of the U.S. market.

The companies that are included in the S&P 500 are selected by the S&P Index Committee. The majority of companies that are included in the index are American based, but there is a small number of international companies that are widely traded in the U.S. In the future, the Index Committee has announced that only U.S.-based companies will be added though. The S&P 500 is a market value weighted index - each stock's weight in the index is proportionate to its market value.

There are two ways that you can invest in the S&P 500. The first is by buying individual shares. The second is by buying shares of an exchange-traded fund (ETF). One form of an ETF is known as SPDRs or Standard & Poor's Depositary Receipts. The average daily volume of trading of SPDRs is the highest of any US stock at over 200 million shares each day. Another form of ETF are iShares S&P 500, which are similar to SPDRs but they include equal shares of all members of the index.

Widely regarded as the best single gauge of the U.S. equities market, this world-renowned index should be watched if you invest. Although the S&P focuses just on the large cap segment of the stock market, it is also an ideal understudy for the total market. The indicies can be used as building blocks for your portfolio creation.

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