THE STANDARD AND POOR’S 500

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Chapter 8 — THE STANDARD AND POOR’S 500
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THE STANDARD AND POOR’S 500

THE STANDARD AND POOR’S 500

The Standard And Poor’s 500 index (S&P 500) refers to an index of 500 companies that have stock traded in the U.S. stock market. It’s also weighted index, but, unlike The Dow Jones Industrial Average the S&P 500 is considered a better picture of how stocks (and therefore investors) are doing since it is influenced more by the performance of larger companies that make up more of investors' portfolios,.They are all large-cap companies that serve as representatives of their industries.

THE STANDARD & POOR’S 500

WHAT DOES THE STANDARD AND POOR’S 500 SHOW

Although The Dow Jones Industrial Average is astonishingly accurate at predicting the entire market from only 30 stocks, the S&P addresses many of the shortcomings of the Dow by keeping an index with a much larger sampling of companies and taking a more considered approach. Standard & Poor's committee of analysts and economists carefully chose each stock on the list.

CALCULATING THE STANDARD AND POOR’S 500

It’s calculated by taking the sum of the adjusted market capitalization of all Standard and Poor's 500 stocks and then dividing it with an index divisor, which is a proprietary figure developed by Standard and Poor's. To prevent the value of the Index from changing merely as a result of corporate financial actions, all such actions affecting the market value of the Index require a divisor adjustment. Also, when a company is dropped and replaced by another with a different market capitalization, the divisor needs to be adjusted in such a way that the value of the Standard and Poor's 500 Index remains constant. All divisor adjustments are made after the close of trading and after the calculation of the closing value of the Standard and Poor's 500 Index. There is a large range of different corporate actions that can require the divisor to be adjusted. 

 

Quiz

The S&P 500 addresses potential shortcomings of the Dow by all of the following except:

Correct
Incorrect
0/76 (0%) Correct
  • 1
    The S&P 500 includes more companies
  • 2
    The S&P 500 includes non-US based companies that are important for the US economy
  • 3
    The S&P 500 makes weighted adjustments to take into account the market cap size of the companies
  • 4
    The S&P 500 includes small cap companies
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Alex's thoughts: 
The guys in suits, also know as Wall Street bankers, refer to S&P 500 as the "Market" and this is the benchmark they use to see if the outperform they market or not.

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