What the S&P 500 actually is

When the news says 'the market rose today,' it almost always means the S&P 500. It's the single most-watched gauge of US stocks - the benchmark trillions of dollars are measured against. Yet most people who hear the number every day couldn't say what it actually is. It's simpler than it sounds, and understanding it removes a surprising amount of mystery from investing.

A basket of 500 large US companies

The S&P 500 is an index - a standardized list - of roughly 500 of the largest publicly traded companies in the United States, spanning technology, healthcare, finance, energy, consumer goods, and every other major sector. A committee at S&P Dow Jones Indices selects the members based on size, profitability, and liquidity. Together these companies represent about 80% of the total value of the US stock market, which is why the index is treated as shorthand for 'US stocks' as a whole.

It's weighted by size, not evenly

The index is market-capitalization weighted, meaning each company's influence is proportional to its total market value (share price times shares outstanding). The largest handful of companies therefore move the index far more than the smallest. In recent years the ten biggest members have made up roughly a third of the entire index, so on any given day the S&P 500's move is heavily influenced by a small number of mega-cap names.

Why it became the default benchmark

• Breadth: 500 large companies across all sectors approximate the whole large-cap US market in one number.
• Rules-based: membership follows published criteria, not opinion about what 'should' go up.
• Cheap to track: because it changes slowly, funds that follow it charge as little as 0.02-0.03% a year.
• A fair yardstick: because it's the market's average, beating it consistently is the bar professional managers are judged against - and most fail to clear.

What it does not include

The S&P 500 is large-cap US only. It excludes small companies (covered by indexes like the Russell 2000), international stocks entirely, and bonds. So a portfolio of only an S&P 500 fund is concentrated in big American companies - excellent diversification within that slice, but not the whole world. That's why many investors pair it with an international fund and a bond fund, or simply hold a total-market fund that includes the smaller US companies too.

The bottom line

The S&P 500 is a market-cap-weighted list of about 500 large US companies that serves as the default scoreboard for American stocks. You can't buy the index itself, but a low-cost fund that tracks it hands you a slice of all 500 companies for almost nothing - which is why an S&P 500 index fund is one of the most common building blocks in a beginner portfolio. Just remember what it leaves out: small caps, international stocks, and bonds, each of which has its own place in a fully diversified plan.