What’s the S&P 500?

We touched on this topic in a previous article, but this week we have a short article on how the S&P 500 is calculated, what it measures, and why it matters. To review, index funds are basically baskets of different kinds of investment holdings (stocks, bonds, other assets.). As we have said earlier, they typically try to match some part of the market based on the belief that the sector they are tracking will outperform other single investments. When you invest in one, you are essentially betting that whatever the index tracks is on an upwards trend. For the S&P 500, this is especially important.

the S&P 500 over time (note the fluctuations in accordance with recessions)

The Standard and Poor 500 tracks the top 500 best-performing companies in the US. The index is a market-capitalization-weighted index, essentially meaning that the highest weights are given to the companies with the largest market capitalizations* Since it tracks the nation’s leading performers, it is often counted as a measure of the stock market’s performance overall. If you take a look at the fluctuations of the index in the last 10 years, you can see that it fluctuates in direct correlation with the health of the US economy itself. During the height of the pandemic and in 2008, you can see that the index declined.

But why is it considered a solid investment?

For one, betting on the S&P 500 and by extension the stock market as a whole is generally a safe bet . The reason why is that despite fluctuations in the market due to recessions and external pressures, the US economy is historically a growing one. That is also why it is important to choose it as a long-term investment, because it can fluctuate and decline a lot in the short term. Though you cannot invest directly into the Standard and Poor 500, you can choose one of any index funds that use it as a benchmark. This isn’t to say that you should definitely invest in a fund that uses it, but hopefully, this gave you some information to break down financial jargon around investing. We hope this helps!

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* market cap = the dollar value number of total company shares held by public stockholders (not by the company itself)

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