A:

S&P 500 components are weighted by free float market capitalization. Larger companies affect the value of the index to a greater degree.

For example, as of March 2015, the sum of the market capitalizations of the companies in the S&P 500 was $18.5 trillion. The largest member of the index was Apple at $720 billion. In contrast, the smallest member of the S&P 500 was Diamond Offshore Drilling, with a value of $3.65 billion.

Changes in Apple's stock price affect the overall index by almost 200 times more than Diamond Offshore Drilling. Due to its size, Apple makes up almost 4% of the index, while Diamond Offshore Drilling accounts for 0.02% of the index.

It is interesting and useful to compare the performance of the market cap-weighted S&P 500 to the equal-weighted S&P 500. In the equal-weighted version, each component is given an equal weighting of 0.2%. Both indexes move together in the same direction for the most part, but by different magnitudes. The relative performance of these indexes reflects liquidity and market conditions amongst investors.

The components of the S&P 500 are chosen by a committee at Dow Jones S&P Indices with the goal of reflecting the overall economy. Companies are added or dropped from the index based on changes in the economy.

The intention of the S&P 500 is to provide an understanding of how the stock market and economy are performing at a quick glance. The S&P 500 is considered to be superior to the Dow Jones Industrial Average (DJIA), which the mainstream media and public use to assess the stock market.

RELATED FAQS
  1. What does the S&P 500 index measure and how is it calculated?

    Learn about what exactly the S&P measures and why it's used by market participants as a tool to understand the broader stock ... Read Answer >>
  2. How is the value of the S&P 500 calculated?

    The S&P 500 is a U.S. market index that gives investors an idea of the overall movement in the U.S. equity market. The value ... Read Answer >>
  3. What's the difference between the Dow Jones Industrial Average and the S&P 500?

    The DJIA is a price-weighted average of 30 stocks whereas the S&P 500 is a market value-weighted index of 500 stocks. Read Answer >>
  4. How can I buy an S&P 500 fund?

    Looking for access to the S&P 500? Learn how to access an S&P 500 index fund or ETF. Read Answer >>
Related Articles
  1. Investing

    S&P 500 ETFs: Market Weight Vs. Equal Weight (RSP, SPY)

    Both S&P 500 and S&P 500 EWI indexes include the same set of stocks, but different weighting strategies give them separate individual properties.
  2. Investing

    Investigating the Effectiveness of Equal-Weight ETFs

    Investors should know the ins and outs of equally weighting stocks before considering the related ETFs.
  3. Investing

    Equal Weight Works Across Market Cap Segments

    Equal-weight mid- and small-cap ETFs can generate stellar returns just like their large-cap brethren.
  4. Investing

    Inside Some Benefits of Equal-Weight ETFs

    Over the long run, equal-weight ETFs offer outperformance potential over cap-weighted rivals.
  5. Investing

    A Venerable Equal-Weight ETF (RSP)

    This ETF is one of the seasoned leaders of the equal-weight pack.
  6. Investing

    S&P 500: The Market’s Heavyweight Nears a Record

    Up and Away: While investors obsess about Dow 20,000, the market value of the S&P 500 is nearing a record $20 trillion
  7. Insights

    The S&P 500: The Index You Need To Know

    Just how are companies added to and dropped from the S&P 500, and how is its value calculated? Curious? Read on.
  8. Investing

    Top Reasons Stock Indices Could Be Biased

    Do the owners of the large stock indices (McGraw Hill Financial, CME Group, and News Corp) have incentive to pick stocks to put in the index that are "shiny" as a marketing ploy? And if so, wouldn't ...
  9. Investing

    The Pros and Cons of Indexes

    Learn about the advantages and disadvantages of stock indexes and passive index funds. Discover how there is an opportunity cost to using index funds.
RELATED TERMS
  1. Equal Weight

    Equal weight is a type of classification that gives the same ...
  2. Weighted Average Market Capitalization

    Weighted average market capitalization refers to a type of stock ...
  3. Portfolio Weight

    The percentage composition of a particular holding in a portfolio. ...
  4. Market Index

    A market index is a weighted average of a section of the stock ...
  5. S&P Phenomenon

    The tendency for a stock that has been recently added to the ...
  6. Four Cs

    Four Cs refers to the four characteristics used to determine ...
Hot Definitions
  1. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  2. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  3. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  4. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  5. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  6. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
Trading Center