A guide to using Standard & Poor’s 500 Index

Standard & Poor’s 500 Index (S&P 500) is a stock index, which tracks changes in the value of a hypothetical portfolio of 400 industrial stocks, 40 utility stocks, 20 transportation companies stocks and 40 financial institutions stocks. The total of 500 different stocks is weighted proportionally to each stock’s market capitalization relatively to a particular base period. S&P 500 Index accounts for the 80% of the total market capitalization of the New York Stock Exchange (NYSE), while two contracts on S&P 500 are traded on the Chicago Mercantile Exchange (CME).  

The base-weighted aggregate methodology used by S&P 500 is a set of combined variables, namely price and number of shares. By multiplying the stock price by the number of common shares outstanding, investors may calculate the market capitalization of a company. Then, they find the corresponding indexed number, which represents the results of each calculation and they can understand how the Index tracks the particular stock over time.  

The total-return calculation of the S&P 500 Index has progressively become highly appreciated by the Association for Investment Management and Research’s (AIMR) and the Securities and Exchange Commission. In order to calculate the total returns for any equity security of the S&P 500 Index for a given time period, an indexed dividend is added to the closing S&P 500 Index value for that period and the total is divided by the closing S&P 500 Index value at the beginning of the time period.  

To calculate the indexed dividend, which is the dividend distribution of the companies in the S&P 500 Index, the total daily dividends for all of the stocks in the Index for a given time period are added. The total is converted into an indexed number by being divided by the Index divisor, which is the basis for comparability at any given time, and for any required adjustments due to changes in the equity composition of the Index. The calculations of the Indexed Dividend are based on the ex-dividend date and not on the payment date in order to consider any the market price adjustment occurring for the dividends. 

The formula used to calculate the indexed dividend is: 

Total Daily Dividends / Index Divisor = Indexed Dividend 

What makes S&P 500 Index attractive is its high liquidity. This is due to the fact that S&P 500 comprises of a great variety of companies from several industries, which offers to investors the opportunity to buy stocks from Technology, Healthcare, Financial Services and Telecommunications sectors at a low cost since there is no need for active management to track, analyze and pick stocks.  

By and large, S&P 500 Index tracks also a large number of mutual funds, which employ short sales of securities listed in the S&P 500. By applying leverage through futures contracts and stock and index options, S&P 500 Index has become one of the world’s most popular trading tools.

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Article Source:http://www.articlesbase.com/investing-articles/a-guide-to-using-standard-poors-500-index-854188.html

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