The Standard and Poor’s 500 (or, as it is most frequently known, the S&P 500) is a stock index composed of 500 large publicly traded companies in the United States.
These companies are selected by the Standard and Poor’s Index Committee and S&P 500 is designed to be one of the main indicators of the evolution of the US stock market. UU.
Many believe that this index is the most representative of the US market, since it contains 500 large first-order companies compared to the 30 that make up Dow Jones.
Companies in the S&P 500
The S&P 500 contains all the Dow Jones companies and another 470 more. Some of the most prominent titles within these 470 include:
|Apple Inc.||Oracle Corp.||Bank of America Corp.|
|Google Inc.||QUALCOMM Inc.||Berkshire Hathaway Inc.|
|Wells Fargo and Co.||Citigroup Inc||Kraft Foods Inc.|
|Microsoft Corp.||PepsiCo Inc.||Comcast Corp.|
Google and Apple, which are not part of the Dow Jones due to the high price of their shares, and which are prominent components of the S&P 500. They present an important weighting but, due to the size of the S&P, they do not dominate it, as was the case with Dow Jones . The S&P has companies from numerous industrial sectors. Next we will see the weights of each sector (precise data in August 2013):
Admission in the S&P 500
In order to be admitted to the S&P 500, the market capitalization of a company must be within the top 500 of the United States. In addition, the S&P admissions committee will consider other criteria:
- Minimum market capitalization of $ 4,000 million
- Sufficient number of publicly traded shares
- Liquidity: minimum trading volume of 250,000 shares each month before the evaluation
- Correct classification of the sector
- New York Stock Exchange or NASDAQ
- Sufficient seniority in these securities markets
- Financial viability of the company. When a company joins the S&P, the price of its shares usually goes up, as index fund managers usually acquire their securities to continue replicating the behavior of the S&P 500.
Weighting of the S&P 500
The weighting method used in the S&P 500 differs from that applied in the Dow Jones, since it weighs the companies according to their total market capitalization.
Thus, market capitalization offers a better indication of the size and total value of a company than the individual price of its securities. The capitalization weighting method of the S&P 500 is also free floating, which means that it only takes into account the number of shares available for trading between institutional investors and retailers. Therefore, it excludes the immobilized shares within the company itself and the state investments.
S&P 500 calculation
Like the Dow Jones, the S&P 500 is calculated using a divider that sets Standard and Poor’s. The calculation of the index adds the market capitalization of each of the 500 companies and divides the result among that divisor. For example, if the market capitalization of the 500 securities equals $ 13 billion and the divisor is set at 8900 million, the value of the S&P index would be 1460.67.
This divisor is adjusted in case of issuance of securities, mergers, changes in the companies that make up the index, in addition to other corporate actions to ensure that these types of events do not alter their value too much. However, unlike Dow Jones, it does not adjust its divisor after a fractionation of shares, since the market capitalization of the company remains the same.
S&P 500 Value
Like the Dow Jones, the S&P reached an intraday high of 1552.87 in March 2000, at the highest point of the dotcom bubble. Subsequently, it registered a sharp decrease of more than 50% until 768.63 during the 2001/2002 crisis due to the prick of the bubble, combined with political and social problems such as September 11 and the wars in Afghanistan and Iraq.
During the boom of the mid-2000s, the S&P skyrocketed again and reached a new record that led it to close in 1565.15 on October 9, 2007. The market began to decline under the financial crisis. It reached its lowest point in 13 years on March 9, 2009, closing at 676.53.
In 2013, we have seen the S&P earn more than 25% thanks to QE3, the third round of quantitative easing measures of the Federal Reserve, which involved the injection into the economy of $ 85 billion to acquire mortgage securitization and Treasury bonds . This monetary policy has caused the price of securities to register a drastic decrease.
On September 19, 2013, the index reached its all-time record and closed the day in 1725.52.
Recent historical evolution of the S&P 500
Next, we will analyze a graph of the S&P 500 from mid-2008 to the beginning of October 2013.
In the previous graph we have highlighted the effect that monetary policy has had on the S&P 500.
QE1: November 2008 – March 2010 Announcement of the first round of quantitative easing (QE1) to try to stimulate the economy and promote the loan at the end of 2008. Ben Bernanke, president of the Federal Reserve, announced that it was going to buy $ 600 billion in mortgage securitization and public debt. The measure was extended on March 18, 2009 and the effect on the markets was swift. The S&P shot more than 500 points, from 700 to more than 1200.
QE2: November 2010 – June 2011 On November 3, 2010, Bernanke announced a second round of quantitative easing to further stimulate the economy. The Reserve was going to buy $ 600 billion of longer-term Treasury securities at a rate of $ 75 billion per month. The market had already discounted the news, since Bernanke had given very clear clues about it a few months before its official announcement. Again, the S&P rose more than 300 points, from 1050 to more than 1350.
Operation Twist: 2011 The Federal Reserve announced on September 21 the start-up of the Twist operation. It was a plan to buy $ 400 billion in bonds with a maturity of between 6 and 30 years and sell others with a maturity of less than 3 years. It was an attempt to achieve the result of quantitative easing without putting more currency into circulation and without increasing the balance of the Reserve. This caused the dollar to appreciate instead of weakening it, as in the case of quantitative easing. Its implementation also had a positive effect on the stock markets, and the S&P went from 1100 to 1450 throughout 2012.
QE3: September 2012 – Present * On September 13, 2012, the Federal Reserve announced a third round of quantitative easing that is still in force to date (* October 1, 2013). The unemployment rate in the US UU. It is the main current concern, and the Federal Reserve has committed indefinitely to acquire $ 40 billion of mortgage securitizations and $ 45 billion of long-term Treasury bonds until the labor market improves “substantially”. Thanks to this third round, the S&P has risen substantially in 2013, reaching its historical record on September 19, 2013. It is likely that before the end of 2013 we will attend a progressive disappearance of these policies.
Elements to remember when operating in the S&P
- S&P futures contracts (called E-Mini) can be traded from 22:01 to 20:14 (GMT), Monday through Friday.
- The S&P moves in sections of 0.25.
- The margin required to operate in the S&P is usually around 0.5% (that is, a leverage of 200: 1) with most brokers.
- The minimum operation size is 1 index.
- The currency of the S&P is the US dollar.
Imagine that we want to BUY 1 index of the S&P 500, that its value is currently at 1600 and that our trading account is denominated in US dollars:
The margin (or funds) that we would have to contribute to open that position would be only $ 8.00. ($ 1600 (S&P price) x 0.5% (required margin) = $ 8.00)
This amount can be seen in the “margin used” section of our trading platform.
If we have an account denominated in another currency, such as the euro, our margin will still be 0.5%, but the platform would automatically convert the $ 8 to euros.
Imagine that the EUR / USD exchange rate is 1,3500. We would see approximately $ 5.90 in the “used margin” section of our euro account.
The S&P 500 fluctuates in movements of 0.25 cents (dollar) so, in our example, if we buy 1 index and the S&P rises from 1600.00 to 1625.25, we would get a profit of $ 25.25 (or € 18 , 70 applying the exchange rate before).