The S&P 500 and How It Works

The S&P 500 and How It Works
The S&P 500 is a stock market index that tracks the stocks of 500 large-cap U.S. companies. It represents the stock market's performance by reporting the risks and returns of the biggest companies. Investors use it as the benchmark of the overall market, to which all other investments are compared.
Over the last 10 years, it has returned 9.49 percent per year. In 2017, it returned 21.83 percent. S&P stands for Standard and Poor, the names of the two founding financial companies.

How It Works

The S&P 500 tracks the market capitalization of the companies in its index. Market cap is the total value of all shares of stock a company has issued. It's calculated by multiplying the number of shares issued by the stock price. A company that has a market cap of $100 billion receives 10 times the representation as a company whose market cap is $10 billion. The total market cap of the S&P 500 is $23.5 trillion. It captures 80 percent of the market cap of the stock market. 
The index is weighted by a float-adjusted market cap. It only measures the shares available to the public. It does not count those held by control groups, other companies, or government agencies.
A committee selects each of the index's 500 corporations based on their liquidity, size, and industry. It rebalances the index quarterly, in March, June, September, and December. To qualify for the index, a company must be in the United States and have a market cap of at least $6.1 billion.
At least 50 percent of the corporation's stock must be available to the public. Its stock price must be at least $1 per share. It must file a 10-K annual report. At least 50 percent of its fixed assets and revenues must be in the United States. Finally, it must have at least four consecutive quarters of positive earnings.
The S&P 500 includes real estate investment trusts and business development companies. The stock must be listed on the New York Stock Exchange, Investors Exchange, NASDAQ, or BATS. It cannot be over-the-counter or listed on pink sheets.
In 2017, the 10 largest companies, with a weighted market cap, in the S&P 500 were Apple; Microsoft; Amazon; Berkshire Hathaway B; Facebook; JP Morgan Chase; Johnson & Johnson; Exxon Mobil; Alphabet C, formerly Google; and Alphabet A. 
The makeup of the S&P 500 industries reflects that of the economy. According to the S&P Dow Jones Indices, the 2017 S&P 500 sector breakdown was:

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  Information Technology: 24.9 percent.
  
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  Financials: 14.7 percent.
  
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  Health Care: 13.7 percent.
  
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  Consumer Discretionary: 12.7 percent.
  
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  Industrials: 10.2 percent.
  
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  Consumer Staples: 7.7 percent.
  
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  Energy: 5.7 percent.
  
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  Utilities: 2.9 percent.
  
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  Materials: 2.9 percent.
  
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  Real Estate: 2.8 percent.
  
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  Telecom Services: 1.9 percent.