The stock market
The Standard & Poor’s 500 is an index of companies listed on the American Stock Exchange, New York Stock Exchange, and the NASDAQ National Market System (Cool Fire Technology, 2004). The list, touted as the “best single gauge” of the United States stock market by its creators, includes the 500 leading companies in U. S. economy, and has been used as an indicator for the general U. S. economy (Standard ; Poor’s, undated). The index was created in 1957, but there has been earlier versions of it introduced in 1923. It was soon restructured to include 400 industrials, 40 utilities, 40 financials and 20 transportation stocks.
S&P also started distributing S&P 500 index values as early as 1986, (Cool Fire Technology, 2004). S&P’ Index Committee–composed of economists and index analysts–maintains the list on a regular basis to ensure that the index reflects the risk and return portfolio of the broader large cap universe. The committee also monitors the companies’ liquidity. (Standard & Poor’s, undated). There are a lot of criteria for both inclusion and removal. Briefly, a company has to be operating in the U. S. with a market capitalization of more than $5 billion.
Additionally, the company must have exhibited positive earnings for four consecutive quarters, and should be adequately liquid, while significantly publicly trading at a reasonable price. The list also takes into consideration sector representation and company type, meaning that the list should maintain a cross-section of companies belonging to different industries, and should not have too many companies belonging to one industry (Standard ; Poor’s, undated). This system implies that the S&P 500 is not a listing of the largest companies, nor is it a dossier of the most expensive stocks.
The list includes many small companies because the index is constructed from bottom-up by industry group, meaning representative stocks from 88 industry groups (as of Dec. 31, 1993) are further group into four sectors. Which is to say that the biggest of utilities companies may not be as big as the smallest of financial companies. This system has allowed the S&P 500 list to become a benchmark for not only the general economy, but also for the individual industry groups and corporations. (Cool Fire Technology, 2004). Index removals happen when a company violates any one of the listing criteria mentioned above.
Additionally, S&P adds that a company that undergoes mergers, acquisitions, or significant restructuring may be removed from the list if they no longer meet the inclusion criteria (Standard & Poor’s, undated). The index is averaged by market capitalization, which is calculated by the stock price multiplied by the number of shares outstanding The market capitalization is then compared against the market weight, which is obtained by dividing the market capitalization of the company on the index by the total market capitalization of the index.