The Standard and Poor's (S&P) 500 Index is an aggregation of 500 major U.S. publicly traded corporations, according to Investopedia. As a result, the value of the index helps provide information on the underlying values of the stocks that comprise it and the general performance of the stock market.Continue Reading
Each stock is weighted according to the market capitalization of the company (the total value of all the company's outstanding shares) using the most recent trading prices from the New York Stock Exchange and Nasdaq, according to the Motley Fool. Standard and Poor's determines which stocks to include in the index based on factors such as liquidity, trading volume, percentage publicly available for sale and a minimum market capitalization of $5 billion. Companies are also selected to ensure that the proportion of the index from any given industry is reflective of that industry's proportion of the major stock exchanges.
Because of the size and diversity of these companies, the S&P 500 Index is often used for financial valuation purposes as a proxy to determine overall performance of U.S. equities, according to Investopedia. While the Dow Jones Industrial Average is often used as a market proxy because the 30 companies that comprise it are large enough to make their averages reflective of market performance, the Dow's relative lack of diversity can result in greater volatility according to the Motley Fool.Learn more about Investing