The S&P 500 is a U.S. market index that serves as a barometer for the movement of the U.S. equity market. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. The value of the S&P 500 constantly changes throughout the trading day based on its underlying constituents.

Key Takeaways

  • The S&P 500 is the benchmark index for large U.S. corporations and is followed closely by economists, investors, and the financial press.
  • The index is currently made up of the 505 largest publicly-traded U.S. stocks using a free-float market capitalization weighting method.
  • This means that the largest and most valuable companies will also carry the greatest weight in the index.

The S&P 500 Deconstructed

Because the index includes multiple classes of stock of some constituent companies—for example, Alphabet's Class A (GOOGL) and Class C (GOOG)—there are actually 505 stocks in the gauge.

The S&P 500 Index’s value is computed by a free-float market capitalization-weighted methodology. The first step in this methodology is to compute the free-float market capitalization of each component in the index. This calculation takes the number of outstanding shares of each company and multiplies that number by the company's current share price, or market value.

Since the S&P 500 is free-float market capitalization-weighted, the market capitalizations only include the shares that are actively available in the market. As such, this excludes nominal shares allocated with exercise rights to executives and other interested parties.

Calculating Market Weights

For example, Apple reported 16.97 million common shares in its third-quarter 2021earnings report, and it has a current market price of $147 per share. This market price gives the company a free-float market capitalization of $2.4 trillion. Next, the market capitalizations for all constituent stocks are summed to obtain the total market capitalization of the S&P 500. This value is used as the numerator in the index calculation.

Calculating the individual market weights shows how the underlying stocks affect the index. The individual market weights are calculated by dividing the free-float market capitalization of a company in the index by the total market capitalization of the index. On June 30, 2021, the S&P 500 total market cap was approximately $36.3 trillion. This implies that Apple makes up roughly 6.6% of the index's market weight. Overall, the larger the greater market weight of a company, the more impact each 1% change in a stock’s price will have on the index.

Free-Float Market Capitalization Methodology

S&P details the mathematical calculations of its free-float market capitalization methodology to lend transparency to its reporting value.

The calculation for the S&P 500 is:

 Index Level = i = 1 n P i × Q i Divisor where: P i = Price Q i = Free-float shares \begin{aligned} &\text{Index Level} = \frac { \sum_{i = 1}^n P_i \times Q_i }{ \text{Divisor} } \\ &\textbf{where:} \\ &P_i = \text{Price} \\ &Q_i = \text{Free-float shares} \\ \end{aligned} Index Level=Divisori=1nPi×Qiwhere:Pi=PriceQi=Free-float shares

This calculation is compared to the S&P 500 equally weighted index which uses the following calculation integrating an equal weighting factor:

 Index Level = i = 1 n P i × I W F i × Shares Divisor where: P i = Price I W F i = The equal weighting percentage \begin{aligned} &\text{Index Level} = \frac { \sum_{i = 1}^n P_i \times IWF_i \times \text{Shares} }{ \text{Divisor} } \\ &\textbf{where:} \\ &P_i = \text{Price} \\ &IWF_i = \text{The equal weighting percentage} \\ \end{aligned} Index Level=Divisori=1nPi×IWFi×Shareswhere:Pi=PriceIWFi=The equal weighting percentage

The S&P 500 and the S&P 500 Equal Weighted Index use an index divisor that scales the index down to a more manageable and reportable level. The divisor is a proprietary value that can change with stock splits, special dividends, spinoffs, and other variables that could affect the index’s value.