How is S&P 500 Calculated?
Updated Sep 15, 2020
S&P 500 is one of the most widely followed stock market index in America as well as overseas. It consists of more than 500 top stocks which are called as index constituents. The value of S&P 500 index is computed based on the market capitalization value of the constituent stocks. Though the method may appear to be complicated and mathematics intensive, it is easy to understand once a deep dive is made into the process. This article explains how the value of the S&P 500 is calculated using a step by step calculation with example.
How S&P 500 Constituent Stocks are Selected?An index is a single value that represents the collective performance of a mixed basket of stocks. In the case of S&P 500 index, there are around 500 different stocks which make up the index. These stocks are selected based on the market value of the companies. The market value, represented by the market capitalization value or simply called as the market cap, is based on the share price and the number of outstanding shares a company has. For example, say a company ABCDE Inc. has a total of 20 million shares outstanding, and its shares are trading at a price of $15 per share, then the market cap of the company comes to $300 million.
The S&P 500 index takes into consideration the market cap values of each eligible company, arranges the list in descending order of market cap value - that is, the company with the highest market cap ranks higher in the list. Top 500 stocks are then selected to be included in the S&P 500 index. Here is a list of the companies that make up the S&P 500 index as of writing.
How S&P 500 value is calculated?The value of S&P 500 index is calculated in the following way. After the 500 companies are shortlisted as described above, their market cap values are taken. Since the share price of each company keeps changing every second as the trading continues, so does the market cap value for each company. A total market cap value is computed by summing up all the individual market cap value for each of the 500 companies. Let's call this total value as 'S&P 500 market cap', as it represents the total market cap value for all the S&P 500 index constituent stocks. Following this, each company's market cap is divided by this sum total value of S&P 500 market cap to arrive at a fractional weight for each company. Based upon the share price change, these weights determine how the overall S&P 500 index value changes. Let's understand this with an example.
Example of S&P 500 calculationLet's say there are only three companies in the index. To keep calculation simple, instead of 500 companies we assume there are only 3 companies (A, B and C). As of January 1, company A had $10 billion market cap, company B had $20 billion market cap, and company C had $30 billion market cap.
Total market cap of all three companies of the index = $10 + $20 + $30 = $60 billion.
Next step involves dividing each company's market cap with the total market cap of the index which will give the index weight for each company.
Company A's index weight = $10 / $60 = 0.16667 = 16.67%
Company B's index weight = $20 / $60 = 0.33334 = 33.33%
Company C's index weight = $30 / $60 = 0.5 = 50%
It indicates that company C has a weight to pull the index up or down by 50 percent, while company B can pull the index by 33 percent.
To understand how these index weights impact the index calculations, assume that index is at a value of 2,000. If the market cap of company C increases by 10 percent on a particular day while there is no change in the market cap of companies A and B, then it will pull up the index by (10 % * 50%) = 5 percent. Therefore, the index will increase by 5 percent from 2,000 to 2,100.
Above example assumes that only one of the company's stocks (C) has changed value, while other constituent companies are having the same value. In reality, all the stocks of the constituent companies keep changing their market value with every passing second. Accordingly, the S&P 500 index is computed in real time by taking the changes based on each stock's weight and corresponding market cap changes. Each stock contributes to the changes in the index based on its respective weight and market value change.
Below is the list of market cap of top S&P 500 index companies which have the largest market cap as of writing. They represent the top 10 companies with the largest weight to move the S&P 500 index.
| Ticker||Company Name||Sector||Market Cap (Sort)|
|AAPL||Apple Inc.||Technology||$1976 billion
|AMZN||Amazon.com Inc||Consumer Services||$1581 billion
|MSFT||Microsoft Corp.||Technology||$1580 billion
|GOOGL||Alphabet Inc Class A||Technology||$1046 billion
|GOOG||Alphabet Inc Class C||Technology||$1046 billion
|FB||Facebook, Inc.||Technology||$776.08 billion
|BABA||Alibaba Group Holding Limited||Miscellaneous||$746.76 billion
|BRK.A||Berkshire Hathaway Inc.||Finance||$523.68 billion
|BRK.B||Berkshire Hathaway||Finance||$522.75 billion
|V||Visa Inc.||Finance||$450.92 billion
See a Full list of Market Cap of all S&P 500 Companies.
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