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What is the Standard & Poor's 500 index?

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Quick Answer

The Standard & Poor's 500 index is an index tracking a selection of companies in the stock market meant to give a general indicator of the health of the economy. The performance of these companies, in theory, reflects the performance of the rest of the companies on the stock exchange.

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Full Answer

A stock market index can be calculated in various ways, but it generally represents a weighted average of the stocks contained in the index. The calculations can be complex, because most indices attempt to correct for stock purchases, new stock issuances, spinoffs, and other moves that can artificially raise or lower the price of a given stock. The Standard & Poor's 500 consists of the total adjusted market capitalization of all stocks on the index divided by a figure the company came up with to represent these changes. By altering the divisor according to moves the individual companies make, the index can maintain a relative value that remains meaningful over time.

The S&P 500 is similar to the Dow Jones Industrial Average, an index that predates the S&P by several decades. The methodology of both indexes is similar, but the DJIA focuses on a smaller group of companies while still attempting to serve as a barometer for the health of the greater economy as a whole.

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