Standard & Poor's 500 index charts daily stock market activity according to earnings, trading volume and historical market differentials, reports Market Watch. The S&P 500 accurately gauges large-cap U.S. equities, states S&P Dow Jones Indices, by including 500 leading companies that cover 80 percent of all available market capitalization.
The S&P 500 index charts its stocks based on factors such as market size, liquidity and industry grouping. The index shows risk and return characteristics, notes Investopedia. The S&P 500 and the Dow Jones Industrial Average are the most significant indexes of large-cap US stocks. All S&P 500 stocks trade on the two largest U.S. stock markets, Nasdaq and the New York Stock Exchange. Many mutual funds and hedge funds chart the performance of the S&P 500 and hold proportionately the same stocks as the index in an effort to match its performance, notes Wikinvest.
The Dow Jones Industrial Average was historically the most respected index for U.S. stocks, notes Investopedia, but because the Dow Jones Industrial Average contains only 30 companies, most investors agree that the S&P 500 is a better representation of the U.S. market. Indeed, as of 2015, investors often see the S&P 500 as the defining index of the market.