How The S&P 500 Is Calculated?

Answer 1

The Standard & Poor's 500 stock index is one the best indicators in the financial world of how the markets are performing. It's considered superior to the Dow Jones Industrial Average because it tracks the movement of 500 stocks (versus just 30 in the Dow) and covers a broader array of industries and sectors.

The S&P 500 differs from the Dow in that it is a market capitalization weighted index. Whereas the Dow is a price weighted index that gives greater weight to stocks with higher prices, the S&P 500 gives the greatest weight to the largest companies. How to calculate the index is not altogether difficult but it can be time consuming if done on your own.

In order to calculate the market capitalization of an individual company, you'll need to multiply the number of the company's shares outstanding by the current stock price. Do that for the remaining 499 stocks in the index and you'll come up with the total market capitalization for the index. Again, some of the biggest companies in the world like ExxonMobil and Apple will carry the greatest weight in the index.

In order to calculate the index's value, the total market capitalization is divided by the index divisor. The index divisor is the same concept that is used in the calculation of the Dow Jones Industrial Average and is helpful in maintaining the index's continuity in the event of stock splits, dividend payments and mergers of the components.

The S&P 500 aims to track 500 of the largest companies in the United States and additions and subtractions to the index's components occur on a regular basis so the S&P 500's divisor is also updated on a regular basis as these swaps are made.

Needless to say, Wall Street has computers that calculate the value of the index on a continuous basis during the trading day due to the number of stocks involved. The math is not that complicated but the sheer volume can be a bit cumbersome.