sp 500 trading guide

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• What is the S&P 500?
• About S&P 500 constituents
• What are the listing criteria for the S&P 500?
• How is the S&P 500 calculated?
• How often do S&P 500 companies change?
• What does the S&P 500 price mean?
• What affects the S&P 500 price?
• Average annual returns of the S&P 500
• S&P 500 market hours
• How to trade the S&P 500
• How to short the S&P 500
• Can you invest in the S&P 500 in the UK?
• S&P 500 companies ranked by market cap

What is the S&P 500?         

The S&P 500 is a benchmark stock index comprising of around 500 of the largest US companies ranked by market cap. It is seen as a key gauge of financial market strength by both domestic standards and global measures alike, due to the considerable interplay between America’s top firms and the economy in general.

Created in 1957 with a value of 386.36, the S&P 500 originally tracked 500 large corporations listed on the New York Stock Exchange. Its ranking is calculated differently from the Dow Jones, which lists companies according to its per-share price. Instead, the S&P 500’s market cap approach makes its ranking method similar to the UK’s FTSE 100 or the German DAX.  

About S&P 500 constituents

The largest constituents of the index by weighting feature technology giants Apple, Alphabet, Microsoft and Facebook, as well as online retail luminary Amazon and Warren Buffett’s investment vehicle Berkshire Hathaway.

Also among the high-profile businesses featured in the index are pharmaceuticals company Johnson & Johnson and investment bank JPMorgan Chase & Co. A more recent addition to the index is the electric vehicle company Tesla, which was listed in December 2020.  

Here’s how the S&P sector composition looked as of May 14 2021, correct as of July 2020 (Source, S&P).

What are the listing criteria for the S&P 500?

The listing for the S&P 500 is dependent on a few strict criteria, meaning that a company’s eligibility by market cap does not necessarily mean automatic entry to the index. As well as market cap, the listing criteria also take into account factors such as organisational structure, share type and liquidity, and the proportion of shares available to the public. 

There is also an element of discretion to the inclusion of a given company. For example, Tesla was originally overlooked for entry by the S&P 500’s index committee, with some suggesting that its extreme volatility may have raised potential reputational concerns for the index.

How is the S&P 500 calculated?

The S&P 500 is calculated using a free-float methodology and takes into account the market cap of each constituent, multiplying its share price by the number of outstanding shares. This calculation disregards those shares that cannot be traded, such as government-owned shares.

Next, the weightings are calculated by dividing the capitalisation of each company by the total capitalisation of the index. For example, if Apple’s market cap is $2 trillion and the total market cap of the S&P 500 is $30 trillion, this would equate to around a 6.6% weighting for the constituent company.

How often do S&P 500 companies change?

S&P 500 company eligibility is under periodical review by the index committee with updates occurring when required, normally within a few days’ notice. As the weighting percentage naturally can be expected to change for all companies, a rebalancing is undertaken four times a year.

What does the S&P 500 price mean?

The price of the S&P 500 indicates whether the share prices of the companies on the index are rising or falling. If the price of the S&P 500 is increasing, it means that a specific company or group of companies are experiencing gains, which is reflected in the price of the overall index. Conversely, if the S&P 500 price is falling, it means that companies on the index are experiencing a decline in price.

As the S&P 500’s ranking is based on a weighted calculation focused on market cap, companies with a larger weighting will often see their share price fluctuations have a correspondingly outsized impact on the wider index.

What affects the S&P 500 price?

The S&P 500 price is affected by a variety of fundamental and technical drivers linked to the performance of the US economy, as well as international influences. Federal Reserve monetary policy often has a notable impact, as do foreign exchange rates, economic data releases, and even commodity prices.

While such drivers may be expected to move the index in a certain direction, there is no guarantee that the move will play out, so traders should consider how determining factors work together rather than simply isolate any one factor. That said, here are a few of the key things to consider when trading the S&P 500.

Monetary policy and economic releases

When Federal Reserve monetary policy is accommodative, interest rates tend to fall and the general money supply and credit opportunities increase. This means corporate debt becomes more attractive to obtain and cheaper to service, creating the potential for business growth and often boosting stock prices in turn.

Additionally, economic data releases can have a large influence on trading decisions. Inflation is one measure that can hit stock indices as it can erode profit margins across sectors and also is seen as a potential forebear of longer-term higher interest rates. For example, in May 2021 inflation fears prompted Apple’s price to fall some 2.4% in a day.

Individual company performance

As mentioned, companies that are weighted the highest in the index are more capable of moving the index than smaller constituents. For example, Apple is considerably more capable of causing changes in the S&P 500 price than Intel.

Socio-political events

Events such as the Great Recession and the coronavirus pandemic are all capable of hitting market demand in one way or another. For example, the pandemic in 2020 caused a sharp deterioration in manufacturing activity and market demand, seeing the S&P 500 plummet 34% in March 2020 from its record high in February that year.

Average annual returns of the S&P 500

Over the last ten years, the S&P 500 has produced an average annual return of 12.1%. The S&P’s average returns are essentially what managed funds will have earned in profit for investors over the course of a year.

You can see the yearly returns from 2011-2020 below. Remember, past returns are no guarantee of future performance. (Source: Macrotrends)

S&P 500 market hours

The S&P 500 is open from 9:30 am to 4 pm Eastern time on weekdays. However there is also pre-market trading which can extend as early as 4 am and go through the market open at 9:30 am. Additionally, after-hours sessions may span from 4 to 8 pm.

Read more on stock market hours.

How to trade the S&P 500

There are a number of ways that you can trade the S&P 500; the most common are derivatives such as CFDs, futures and options, as well as ETFs. All of these instruments enable you to get exposure to all 30 companies from a single position.

S&P 500 CFDs

Contracts for difference (CFDs) are derivatives that take their price from the underlying market, in this case the S&P 500. As you’ll never be taking ownership of an asset, you can speculate on whether the index is going to rise or fall in value.

Learn more about CFDs.

S&P 500 futures

Futures contracts are agreements to exchange an asset at a set price on a set expiry date. Unlike most futures, S&P 500 contracts don’t have an underlying physical asset to exchange, as an index is nothing more than a number representing a group of stocks.

S&P 500 options

S&P 500 options are contracts that give you the right, but not the obligation, to buy or sell the index at a set price on a set date.

As and when you can trade S&P 500 options with us, you’d be doing so via CFDs. 

S&P 500 stocks and ETFs

You can also trade the S&P 500 through ETFs, or investment instruments that hold a group of stocks – in this case, the shares of constituents on the index. City Index, for example, offers the iPath S&P 500 VIX B Series CFD, which is technically an Exchange Traded Note or ETN, but still provides exposure to the S&P 500.

Alternatively, stocks on the S&P 500 can naturally be traded individually, offering an opportunity to focus on particular sectors of interest.

Find out more about share trading with us.

How to short the S&P 500

Shorting the S&P 500 involves taking a position that the index will fall. This can be done by selling short an S&P 500 contract or shorting constituent stocks. Alternatively, traders may be interested in shorting an S&P 500 ETF. For options, you can buy Put options on S&P 500 stocks if you believe them to be overvalued, or buy a Put option on an S&P 500 ETF.

Read more about shorting a market.

Can you invest in the S&P 500 in the UK?

You can invest in the S&P 500 in the UK, albeit indirectly, through a combination of ETF, mutual funds or index funds, or of course trade the security through derivatives in the methods outlined above.

S&P 500 companies ranked by market cap

The below chart shows the top ten companies in the S&P 500, correct as of May 2021. At the point captured, the top ten alone made up 27.2% of the weighting for the entire index, illustrating the influence these companies can have on the whole benchmark.

Rank	Ticker	Company name	Weighting
1	AAPL	Apple	5.9%
2	MSFT	Microsoft	5.4%
3	AMZN	Amazon	4.2%
4	FB	Facebook	2.2%
5	GOOGL	Alphabet (Class A shares)	2%
6	GOOG	Alphabet (Class C shares)	2%
7	TSLA	Tesla	1.5%
8	BRK.B	Berkshire Hathaway	1.5%
9	JPM	JP Morgan Chase & Co	1.3%
10	JNJ	Johnson & Johnson	1.2%