What is the S&P 500?
The Standard & Poors 500
The Standard & Poors 500 is an index comprising of 500 stocks that are considered to be widely held. Companies included in the index are selected by the S&P Index Committee, a team of analysts and economists at Standard & Poor’s. The index selects its companies based upon their market size, liquidity, and sector. Most of the companies in the index are solid mid cap or large cap corporations. Like the Nasdaq Composite Index, the S&P 500 is a market-weighted index.
The S&P 500 is one of the most commonly used benchmarks for the overall U.S. stock market. The Dow Jones Industrial Average (DJIA) was at one time the most renowned index for U.S. stocks, but because the DJIA contains only 30 companies, it is now generally accepted that the S&P 500 is a better representation of the U.S. market, hence it is now considered as defining the market.
Other popular Standard & Poor’s indexes include the S&P 600, an index of small cap companies with market capitalisations between $300 million and $2 billion, and the S&P 400, an index of midcap companies with market capitalisations of $2 billion to $10 billion.
To implement an investment strategy using the S&P 500, there are a number of financial products based on the S&P 500 in which you can invest. It would not be an easy task to buy 500 different stocks on the S&P hence in order to do this, you would have to choose either an index fund or an exchange traded fund.
An index fund is a kind of mutual fund which has a portfolio that is created to follow or match the pieces of a market index such as the S&P 500. The benefits of an index mutual fund are that they have a wide market exposure and the turnover is low because of the breadth of the index. Index fund trading investing refers to passive investing, a strategy involving a low degree of buying and selling action. Passive investors buy investments with the purpose of long-term index appreciation and low maintenance.
Exchange traded funds are a security that follow an index, commodity or a basket of assets. They trade in the same way as a stock on an exchange. The price of ETFs fluctuate during the day, in the same way as a stock would, when they are purchased and sold.
Should you prefer to invest in the long term rather than trade on a daily basis, it is recommended that you invest in an index fund. However, if you are averse to risk but still wish to control trades, it is preferable to invest in the S&P 500 exchange traded fund. Trading the S&P 500 can be done via a broker such as Banc De Binary, offering a variety of opportunities to maximise your profits.