How Is the Value of the S&P 500 Calculated?

The Value of the S&P 500 Is Constantly Changing

The S&P 500 Index serves as a barometer for the movement of the U.S. equity market. It tracks the price movements of 500 leading U.S. companies, capturing the activity of approximately 80% of the market capitalization of all U.S. stocks.

The value of the S&P 500 changes constantly throughout the trading day based on the movements of its underlying constituents. Its calculation includes the number of shares being traded as well as the share price of each company.

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 media.
  • It is a weighted index made up of the 500 largest publicly-traded stocks listed on the U.S. exchanges.
  • The weighting system ensures that the largest and most valuable companies will carry the greatest weight in the index.
  • The index is in a constant state of flux when the markets are open.
  • A company needs a minimum market capitalization of $11.8 billion to be listed on the S&P 500.

The S&P 500 Deconstructed

The value of the S&P 500 Index is computed by a free-float market capitalization-weighted methodology. This is the method used by most of the world's leading indexes.

The first step in this methodology is to compute the free-float market capitalization of each component in the index. The free-float market cap is the total value of all shares of a stock that are currently available in the market.

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.

The market capitalizations only include shares that are available in the market. That excludes shares allocated with exercise rights to executives and other interested parties.

Calculating Market Weights

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.

For example, Apple reported 16.41 billion common shares outstanding as of May 27, 2022, and it closed the day at a market price of about $149 per share. That gives the company a free-float market capitalization of $2.44 trillion.

As of May 27, 2022, the S&P total market cap was about $38.29 trillion. This implies that Apple makes up roughly 6.5% of the index's market weight.

Overall, the larger the market weight of a company, the more impact a change in its stock’s price will have on the index.

The S&P 505?

There are actually 505 stocks in the S&P 500 Index since it includes multiple classes of stock of some of its constituent companies. For example, Alphabet's Class A (GOOGL) and Class C (GOOG) both are in 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.

Why the S&P 500 Matters

The S&P 500 is one of the most widely viewed indexes in the world. It represents the largest companies in the U.S. And, since the U.S. is the world's largest economy by a significant margin, there are many who simply consider the S&P 500 a representation of the health of the global economy.

Certain companies with market caps in the trillions can have an effect on the S&P 500 as they rise and fall, but it usually takes price movements in entire sectors to substantially move the index.

Since the index is broad and diversified, it typically only makes a significant daily move when major events occur such as a change in the federal funds rate or a war that affects trade between markets.

When investors compare individual stock performance against an index, they almost always use the S&P 500 as the point of reference. Money managers and mutual fund managers compare the performance of their portfolios against the S&P 500 to determine if they beat market returns.

How Is an S&P 500 Return Calculated?

The S&P 500 return is calculated the same way an individual stock return is calculated.

If an investor purchases exposure to the S&P 500 through an exchange-traded fund (ETF) such as SPY, and the value of the S&P 500 rises, the ETF's price will mirror that rise.

Why Does the Value of the S&P 500 Matter?

The S&P 500 Index is a benchmark of the health of the U.S. markets. Its movements reflect the collective sentiment of investors about the current state of the economy and its immediate future.

The reverse is true as well: The value of the index has a direct effect on investor sentiment and risk appetite.

Moreover, investors judge the performance of their investments against the performance of the S&P 500. "Beating the market" means exceeding the S&P 500's return.

What Is the S&P 500 Index?

The S&P 500 index is a list of companies whose prices and volume are tracked continually in order to gauge the relative performance of the markets as a whole.

The list includes 500 of the biggest publicly-traded companies listed on the New York Stock Exchange and the Nasdaq. The components are selected to collectively reflect the broadest spectrum of the U.S. economy.

Its full name is the Standard & Poor's 500 Index. It was created in 1957 by the Standard & Poor's Co., a credit rating agency, and is still majority-owned and managed by the company's modern incarnation, S&P Global.

The Bottom Line

The S&P 500 Index, despite being comprised of 500 companies, is relatively easy and straightforward to calculate. Fortunately, there is no need for any investor to do the calculation. The latest value of the index is constantly available from many sources because, for most investors, it is a shorthand expression of the current state of the markets.

Article Sources
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