Formally known as the S&P 500 Composite Stock Price Index, the S&P 500 was introduced in 1957 and was initially a market capitalization weighted index but switched to being a float weighted index in 2005. The index consists of 500 stocks traded on the New York Stock Exchange (NYSE), American Stock Exchange (AMEX) and the Nasdaq National Market System (NASDAQ) and is the industry standard for portfolio performance benchmarking. Mutual funds which are unable to beat the S&P 500 are considered to be underperforming.
The S&P 500 comprises leading companies that are representative of various industries in the United States economy. No coincidence that many of the component stocks are large cap companies with average market capitalization of about $26 billion. Total market capitalization of all the companies in the S&P 500 exceeds $11 trillion.
The selection process is performed by an autonomous S&P Index Committee. No company can apply or be nominated for inclusion into the index.
Companies that meet the above criteria are placed in a replacement pool, ready to be included into the index when there is a vacancy.
Standard & Poor believes that turnover in index membership should be avoided whenever possible. Hence companies which were added to the index usually stays in the index unless too many of the addition criteria has been violated or if the company no longer exist due to mergers and acquisitions.
Smaller companies have high reward/high risk profiles while larger companies typically have a low reward/low risk profiles. Hence the size of a company is a determinant of asset class but because S&P 500 companies are predominantly large and mid caps, the S&P MidCap 400 and S&P SmallCap 600 indices were introduced. S&P MidCap 400 comprises companies with market capitalization of between $1.5 billion and $5.5 billion while S&P SmallCap 600 comprises companies with market value of between $300 million and $2 billion. Together, they combine to form the S&P 1000 index.
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