S&P 500 Index

Formally known as the S&P 500 Composite Stock Price Index, the S&P 500 was introduced in 1957 and was initially a market capitalization weighted index but switched to being a float weighted index in 2005. The index consists of 500 stocks traded on the New York Stock Exchange (NYSE), American Stock Exchange (AMEX) and the Nasdaq National Market System (NASDAQ) and is the industry standard for portfolio performance benchmarking. Mutual funds which are unable to beat the S&P 500 are considered to be underperforming.

The S&P 500 comprises leading companies that are representative of various industries in the United States economy. No coincidence that many of the component stocks are large cap companies with average market capitalization of about $26 billion. Total market capitalization of all the companies in the S&P 500 exceeds $11 trillion.

Selection

The selection process is performed by an autonomous S&P Index Committee. No company can apply or be nominated for inclusion into the index.

Addition Criteria

1. Only U.S. companies can be included.
2. Adequate liquidity with reasonable stock price.
3. Market capitalization of $5 billion and above.
4. Financial viability, typically measured as four consecutive quarters of positive reported GAAP earnings.
5. Public float of at least 50%.
6. IPOs can only be considered 6 to 12 months after their launch.
7. Company must not be a closed-end fund, holding company, partnership, investment vehicle or royalty trust. REITs and BDCs are eligible for inclusion.
8. Sector balance for the index must be maintained after inclusion of the company.

Companies that meet the above criteria are placed in a replacement pool, ready to be included into the index when there is a vacancy.

Deletion

Standard & Poor believes that turnover in index membership should be avoided whenever possible. Hence companies which were added to the index usually stays in the index unless too many of the addition criteria has been violated or if the company no longer exist due to mergers and acquisitions.

S&P MidCap 400 & S&P SmallCap 600

Smaller companies have high reward/high risk profiles while larger companies typically have a low reward/low risk profiles. Hence the size of a company is a determinant of asset class but because S&P 500 companies are predominantly large and mid caps, the S&P MidCap 400 and S&P SmallCap 600 indices were introduced. S&P MidCap 400 comprises companies with market capitalization of between $1.5 billion and $5.5 billion while S&P SmallCap 600 comprises companies with market value of between $300 million and $2 billion. Together, they combine to form the S&P 1000 index.

Related Links

• CBOE S&P 500 BuyWrite Index (BXM)

You May Also Like

Continue Reading...

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results....[Read on...]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount....[Read on...]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time.....[Read on...]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®.... [Read on...]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date....[Read on...]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative....[Read on...]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date....[Read on...]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin....[Read on...]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading.... [Read on...]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator.... [Read on...]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa.... [Read on...]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as "the greeks".... [Read on...]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow.... [Read on...]

Follow Us on Facebook to Get Daily Strategies & Tips!

Options Basics

Futures Basics

Bullish Strategies

Bearish Strategies

Neutral Strategies

Synthetic Positions

Options Arbitrage

Options Strategy Finder