A Simple Description of the S&P 500 Index and How It Eliminates Market Risk

The S&P 500, or simply the S&P, is an index comprising the top 500 public companies listed and traded in multiple stock exchanges in the United States of America.

These companies are selected, grouped and arranged based on market capitalization, industry, performance, and long-term feasibility of the companies.

Therefore only top ranking 500 large cap companies are selected to be in the index. 

Large cap companies are companies whose market capitalization exceeds ten billion united states dollars (USD 10B).

Top 11 companies listed in the S&P 500 include;

  1. Microsoft Corporation (MSFT)
  2. Apple Inc. (AAPL)
  3. Amazon.com Inc. (AMZN)
  4. Facebook Inc. (FB)
  5. Johnson & Johnson (JNJ)
  6. Alphabet Inc. (GOOG)
  7. Berkshire Hathaway Inc. (BRK.B)
  8. Procter & Gamble Company (PG)
  9. Visa Inc. (V)
  10. JPMorgan Chase & Co. (JPM)
  11. UnitedHealth Group Incorporated (UNH)

Market capitalization is the total amount of a company’s outstanding shares multiplied by its current trading stock price.

The trading symbol for the S&P 500 index is SPX.

The price of the SPX is determined by a weighting on the 500 stocks based on the market capitalization.

The S&P 500 equities include relatively all different sectors in the United States.

Sectors in the S&P 500 index include;

  • Information and Technology.
  • Health Care.
  • Financials.
  • Communication Services.
  • Consumer Discretionary.
  • Industrials.
  • Consumer Staples.
  • Energy.
  • Utilities.
  • Real Estate.
  • Materials.

The S&P 500 therefore gives an overview on the performance of the United States economy and its current trend.

S&P 500 could be seen as an ideal risk averse investment, especially to novice investors, because of its nature.

Risk averse means that an investor prefers to take less risk to avoid high exposure to price movements or leverage, and as a result expects lower returns.

Because the S&P 500 include hundreds of stocks from different sectors and industries, the huge risk associated with individual stock volatility is eliminated.

S&P 500 is also seen as a steady long term investment because of the highly ranked nature of the companies selected, ones that are long term performers not only in steady stock capital gains, but also their impact on the society and economy as a whole.

Individual low performing equities, in variables such as stock price movements or low reported earnings, generally have low impact in the overall performance of the SPX index due to its diversification in assets.

Conclusively, SPX index covers most of the market risk involved in the trading of stock equities, as such S&P 500 index sums up to be a highly ranked buy and hold investment.

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