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.
Because the index includes multiple classes of stock of some constituent companies — e.g., Alphabet's Class A (GOOGL) and Class C (GOOG) — there are 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 is done by taking the number of outstanding shares of each company and multiplying 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.
For example, Apple reported 4,801,589,000 basic common shares in its fourth quarter 2018 earnings report and it has a current market price of $148.26. This gives it a free float market capitalization of $711.9 billion. Next, the market capitalizations for all 505 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.
In order to understand how the underlying stocks affect the Index, the individual market weights can be calculated. This is done by dividing the free float market capitalization of a company in the Index by the total market capitalization of the Index. As of January 2019, the S&P 500 total market cap was approximately $23 trillion. This gives Apple roughly a 3% market weight. Overall, the larger the market weight of a company, the more impact each 1% change in a stock’s price will have on the Index.
S&P details the mathematical calculations of its free float market capitalization methodology to help provide investors with transparency on its reporting value.
The calculation for the S&P 500 is:
Index Level = [Sum of Pi *Qi] / Divisor
Pi = Price
Qi = Free float shares
This compares to the S&P 500 equally weighted index which uses the following calculation integrating an equal weighting factor:
Index Level = [Sum of Pi * Shares * IWFi] / Divisor
Pi = Price
IWF = The equal weighting percentage
The S&P 500 and the S&P 500 Equal Weighted Index use an index divisor which 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.