January 2, 2018

Why is Everything Compared to the S&P 500?

It’s a good question, right? Let’s start with defining the S&P 500, which is a U.S. stock market index
based on the market capitalizations of 500 large corporations. These companies all have common stock
listed on the NYSE, which is the largest such exchange in the world, or the NASDAQ, which is the
second largest exchange in the world.

The S&P 500 is the most popular and relatable equity index in the world of finance. Many people think it
represents the U.S. stock market – and the state of the U.S. economy – better than anything else. As a
result, traders use the S&P 500 as a benchmark to gauge the performance of their individual portfolios
and judge their success or failure. Obviously, things aren’t working out too well for this particular trader.

The question is, should he really be using the S&P 500 as the standard of comparison? And should he be
quite that upset? The answer is—not necessarily.

Let’s take a closer look at the S&P 500.
History of the S&P
The Standard & Poor’s 500 was first introduced back in 1957. The idea was that the equity index would
be used to monitor the value of 500 large corporations listed on the New York Stock Exchange. In
addition, the S&P 500 became a good indicator for the overall health of the economy.
As the decades roll on, the S&P 500 provides a historic timeline for the highs and lows of the U.S.
economy. Economists and traders can make future predictions about the stability of the market by looking
back at past trends.
However, in order to “make the list,” companies need to meet certain criteria based on the following:

  • market capitalization
  • financial viability
  • sector classification
  • time publicly traded
  • liquidity
  • domicile
  • public float
  • stock exchange

While these criteria determine who qualifies for the index, ultimately, a committee reviews a company’s
merit to determine if it is eligible for the S&P 500. The index is updated on a quarterly basis.
Who makes the list?
The S&P 500 tracks the market capitalization of the 500 most commonly held stocks on the New York
Stock Exchange or NASDAQ. Market capitalization refers to the sum total of all shares of stock that a
company issues. Here are the companies with the top 10 largest holdings on the S&P 500:

  1. AAPL — Apple Inc
  2. MSFT – Microsoft Corp
  3. XOM – Exxon Mobil Corp
  4. J&J — Johnson & Johnson
  5. GE — General Electric Co
  6. FB — Facebook Inc
  7. AMZN – Amazon.com Inc
  8. BRK.B – Berkshire Hathaway Inc
  9. T – AT&T Inc
  10. WFC – Wells Fargo & Co

 

So is the S&P 500 a good measure of your success as a trader?

Not always. Why? Because many investors have assets besides stock, such as precious metals and bonds,
and these are not reflected in the S&P 500. Also, the S&P 500 is heavily weighted towards larger market
cap companies with a capitalization of more than $5 billion that are headquartered in the U.S. Investors
may have overseas investments not reflected in the S&P 500, or investments in small-cap companies.
In other words, the S&P 500 is not always a great benchmark for individual traders to use—which doesn’t
stop anyone from using it. While not perfect, it seems to be a better benchmark than most others.
By joining and following day trading community like Chartify, you can see how your trading skills compare to other
members and to the S&P 500. Additionally, by improving your own trading performance, you can attract
new followers, charge them a set price, and earn some extra money on the side. Then maybe you’ll look
happier than that poor dude in the above picture.

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