With thousands of companies listed publicly in the stock market in the US alone, investors, finance professionals, economists, and policymakers need ways to assess overall trends and measure performance. This is where the S&P 500 comes into the picture as an index that can demonstrate overall market movements. 

In this article, we’ll cover:

• Why the S&P 500 is important
• S&P 500 companies and how it’s calculated
• How it differs from other indexes
• What does it mean to invest in the index?

Why is the S&P 500 important? 

While numerous indexes can measure market performance, the S&P 500 is the most popular, alongside the Dow Jones Industrial Average (or DJIA). And it’s not just popular; it’s really good at showing you what’s going on.

The S&P 500 achieves this accuracy by encompassing the 500 largest companies listed on the New York Stock Exchange (NYSE) or the Nasdaq exchange, ranked by their respective market capitalizations. The remarkable aspect here is that these 500 companies collectively contribute to roughly 80% of the total market capitalization of all publicly traded companies. This means that when you consider the S&P 500, you are essentially gaining insights into the performance of a substantial majority of the stock market.

This level of representation is crucial because it allows investors, analysts, and policymakers to gauge the health and direction of the market more accurately. By following such a significant portion of the market’s total value, the S&P 500 becomes a barometer of overall market trends. It effectively captures shifts in various sectors, industries, and economic conditions. 

This is really helpful for people who want to invest their money or just understand what’s happening in the economy. When you hear that ‘the market is up’ or ‘the market is down,’ often, people are talking about how the S&P 500 is doing.

And because the S&P 500 is so important, many investment funds (both mutual funds and ETFs) are based on it. These index funds let you invest your money in a way that follows how the S&P 500 is doing. You essentially get a piece of each company without having to buy individual shares of each one.

Companies of the S&P 500 in 2023

Because it is such a prominent index, many people ask: is the S&P 500 inclusive of all US stocks? The answer is no. However, it includes most of the overall market cap through the stocks it measures. 

Since the S&P 500 includes the 500 largest market cap companies, you may wonder how and when this list gets updated or if companies are on it for life once they make it. Because companies go up and down in market cap value, they make their way on and off the list. Similarly, as companies overtake one another in size, they represent a larger portion of the index, as it is weighted proportionally, making it known as a “free float-adjusted market-cap-weighted index.” 

As a result, the largest companies can have a distinct impact on the performance of the index since they are more represented than their peer stocks. This is part of what makes the S&P 500 such an accurate representation of the economy and market as a whole. 

Here are the top 10 companies in the S&P 500 by index weight as of November 2023: 

1. Microsoft
2. Apple
3. Amazon
4. NVIDIA Corporation
5. Alphabet (class A)
6. Meta Platforms Inc (class A)
7. Alphabet (class C)
8. Berkshire Hathaway Inc. (class B)
9. Tesla
10. Unitedhealth Group Incorporated

The S&P 500  vs other stock indexes

The S&P 500 is not the only stock market index. There are many ways to measure market performance and aggregate stock data. Let’s explore how the S&P compares to another popular index. 

When it comes to calculating the S&P 500, remember that:

• It includes the largest 500 companies measured by market capitalization. 
• Companies are weighted differently within the index according to their market cap. 
• It is a free float index.
• These factors result in the S&P representing around 80% of the total market cap in the stock market. 

Dow Jones Industrial Average (DJIA)

While S&P 500 represents the 500 largest companies and offers a broader view of the market’s health, the Dow Jones Industrial Average (DJIA) includes only 30 blue-chip companies and calculates its average based on stock prices, not market value, making it less comprehensive but more sensitive to high-priced stocks. The list of companies can also change over time according to adjustments in the economy and market. 

Nasdaq Composite Index

While the S&P 500 covers the broader market, the Nasdaq Composite focuses exclusively on companies listed on the Nasdaq exchange, emphasizing technology-heavy firms, making it a narrower representation with a focus on tech-driven sectors. The Nasdaq Composite is a market-value-weighted index, where the impact of each component is proportionate to its total market value, rather than just its market capitalization. This can lead to differences in how individual companies affect the index’s movements.

Beyond these two examples, there are also the Nikkei 225, DAX, Nasdaq Composite, Russell 2000, and many more. 

Investing in the S&P 500

Since it isn’t a company itself, you can’t invest directly into the S&P 500 like it was a stock, but you can buy shares in index funds that track the S&P 500’s performance as a whole. It’s like getting a piece of all the companies in the index, which spreads out your investment and gives you diversity like the index itself.

Investing in index funds can be helpful in many ways:

• Diversification for your portfolio: Since the index represents 500 companies, you won’t expose yourself to extensive risk by hinging on a single business’s performance. 
• Exposure to market gains: You will have the opportunity to profit from overall market upward trends and build wealth with your investment. 
• Passive investment strategy for beginners: You won’t continuously trade or manage money. When you invest in an index fund, it’s simple to put the money in and let it sit for the long term, especially when you’re new to investing. 
• Low cost: You won’t be actively trading, and index funds are not managed actively like some other more costly funds, so the associated fees will be low. 

Investing in the S&P 500 offers a strategic approach to benefit from the collective performance of 500 leading companies and purchasing shares in index funds that mirror the index’s performance allows you to tap into its diversified potential.

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Ten years ago this week, an investment bank called Lehman Brothers collapsed, ushering in the worst financial crisis the U.S. had experienced since the Great Depression.

The bank’s failure set off a chain reaction with other banks and the stock market, stoking a financial panic that led to a severe recession in the U.S. and ultimately throughout the globe.

But a decade later, the U.S. economy is in full recovery, and many of the world’s other economies have recouped their losses too. Unemployment is at a near-record low. Housing prices have rebounded from their depths. And workers’ wages are rising at the fastest pace since 2008.

Still, it’s important to remember our financial history, and to see what caused the worst recession in nearly 80 years, and to understand how things have changed.

Here’s a look back at the most important events:

Why was Lehman Brothers’ failure such a big deal?

In September 2008, Lehman became the first in a series of big banks to collapse, following risky bets in the housing market. The banks became illiquid—essentially a term that means they ran out of money to fund their operations.

Lehman Brothers was one of the oldest and most prominent investment banks in the U.S., founded in 1844, with assets worth hundreds of billions of dollars.

An investment bank is different from a commercial bank, where you do your daily banking. Investment banks specialize in giving corporations, governments, and other entities access to markets, by allowing them to sell stocks and bonds. They also help new companies sell their shares to the public in a process called an initial public offering.

Government officials discussed a bailout for Lehman but ultimately decided against it. As the bank collapsed, it set off a ripple effect that endangered or bankrupted dozens of other financial institutions, including investment and commercial banks and insurance companies, including AIG, Merrill Lynch, Washington Mutual, and Wachovia.

Good to know: An investment bank called Bear Stearns failed months before Lehman, but before it could go bankrupt, it sold itself to the bank JPMorgan Chase, following pressure from the U.S. government.

In hindsight, many financial experts say the federal government could have limited financial damage to the economy if regulators had rescued Lehman Brothers.

Ultimately, hundreds of other banks failed in the two years following Lehman’s meltdown, and the government stepped in with $700 billion in funding to either rescue them or shut them down, in a program that was known as the Troubled Asset Relief Program (TARP).

The Housing Crisis

The financial crisis had its roots in the housing market, specifically with home mortgages.

In the 2000s, banks loosened their credit standards for mortgages and sold trillions of dollars of high-dollar loans to risky borrowers. These were known as “subprime mortgages,” because they were given to borrowers with either bad or low credit scores. Investment banks packaged the loans together and sold them to investors, who had little insight about the underlying risks of these securities.

The investments were also resold as something called derivatives, which are complex trading instruments. These were referred to as “collateralized bond obligations” (CBOs), and they grew so complicated, that few people actually knew what they contained.

Ultimately, a tidal wave of subprime mortgage borrowers defaulted on loans they could not afford when home values started to fall in 2007. That set off a chain reaction with banks that had loaned money that would never be repaid.

These unpaid mortgages became known as “toxic assets,” because they were essentially trillions of dollars in worthless debt.

Financial institutions had more debt than cash, and wound up short of funds to pay their investors, and even customers.

Impact on the stock market

In the six months that followed the crisis, indexes such as the S&P 500, which represents 500 of the largest company stocks in the U.S., fell 40%. Investors lost trillions of dollars of wealth.

Good to know: The S&P 500 has since regained its pre-recession value, gaining 130% over the last decade, with total annual returns of 11%. Investors who kept their money invested over the last decade are likely to have made back all of their losses.

The federal government took action in the months following the crisis. Here’s a look at some of its key actions.

Quantitative easing. The nation’s central bank, known as the Federal Reserve, played an active role in rescuing the U.S. economy during the financial crisis of 2008. It did this—through a process that came to be known as quantitative easing—by lowering interest rates, purchasing government bonds known as U.S. Treasuries, thereby pumping money into the banking system.

Federal regulation. In an attempt to prevent banks from taking risky bets with customer money, Congress passed something known as the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010.

More about Dodd-Frank

Dodd-Frank established new regulations to ensure that banks wouldn’t seize up and threaten the foundation of the economy again in the case of a financial crisis. Regulators concerned themselves particularly with large banks, deemed “Too Big to Fail,” whose collapse could jeopardize the entire financial system.

Among the new rules, most big banks were required to keep more money on hand to make sure they had a cushion in the event of another financial crisis. They also were forced to undergo strict “stress tests” to ensure they could handle a sudden economic downturn.

Dodd-Frank also restricted the kinds of business activity banks could pursue. Remember the mortgage disaster? Something called the Volcker Rule, a part of the new regulations, prohibited banks from taking risky bets with customer deposits, as they had done in the run-up to the mortgage crisis.

Our economy in 2018

So where are we now?

Ten years into a recovery, the stock market is at an all-time high and housing prices have returned to their pre-recession levels. Unemployment is at a 20-year low, wages are rising. Consumers are spending again.

The Fed has ended its quantitative easing program and is increasing interest rates once more. Meanwhile, Congress has begun rolling back some of the regulations affecting banks.

For the time being, the economy appears in sound shape. But it took many years to get here, and experts are still watchful about the next financial crisis.

“What we all learned in that particular panic is that we’re all dominoes,” Berkshire Hathaway founder and world-famous investor Warren Buffett recently told CNBC in an interview about the financial crisis. “And we’re all very close together.”

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