Share this Page URL

Lesson 15. The Ticker Tape, Stock Indice... > The Standard & Poor's 500 - Pg. 98

The Ticker Tape, Stock Indices, and Other Media 98 The Standard & Poor's 500 Standard & Poor's Corporation, a subsidiary of McGraw-Hill, Inc., is a well-respected financial company, providing a variety of services such as stock and bond ratings and publication of a number of financial advisory reports. In 1957 Standard & Poor's launched its own index, the Standard & Poor's 500, or the S&P 500 as it is more commonly known. Plain English The Standard and Poor's 500 is an index composed of the 500 largest stocks trading on the NYSE and the NASDAQ. The 500 stocks are further subdivided into four industry indices that are meant to measure the results of these particular industries. Like the Dow and the NASDAQ, a significant portion of the S&P 500's popularity is a result of the high regard with which investors hold its issuing company. More important, however, is the con- tinuing accuracy of the index. The S&P is particularly well suited for this, as it is composed of the 500 largest stocks that trade on either the New York Stock Exchange or the NASDAQ system. This prevents the S&P 500 from being unduly affected by the movements of one particular market. In addition, with a sample base of 500, this index is also less affected by extreme circumstances surrounding any one particular stock. Finally, to compensate for the varying sizes of the 500 stocks, each stock is weighted within the divisor formula to adjust for its own particular size within the context of the index as a whole. But the safeguards as well as the similarities don't stop there. The stocks listed on the S&P 500 are further broken down into four industry segments that are designed to represent the overall health of the American markets. Also, in a further attempt to adjust for the appropriate level of effect that each industry has on the market as a whole, the number of stocks assigned to each industry is not equal. These four industrial segments and the corresponding number of stocks assigned to them in the S&P 500 are listed in the following table: Industry General Industry Finance Transportation Utilities Number of Represented Stocks 400 40 20 40 Like the four Dow averages, each of the four S&P 500 segments has its own individual index, al- though the total of the four is used substantially more often than the individual averages. Because of these stringent safeguards in selecting the samples that compose the index, the S&P 500 has become particularly popular with people who are directly or indirectly involved in finance. Investment managers, for example, as well as technical analysts, banks, and insurance companies, all rely heavily on the S&P 500 as an indication of the market's health. As a result, the S&P is often used to index portfolios. This means that the stocks selected for inclusion in the S&P 500 are also selected to create individual or institution portfolios. Creating your own personal portfolio to match the S&P would, in theory, position the portfolio to mirror the success, or failure, of the S&P 500 directly. The AMEX Market Value Index The American Stock Exchange (AMEX) Market Value Index, or the AMEX index as it is more pop- ularly known, lists 800 stocks that trade on the American Stock Exchange. Much like the NASDAQ, then, the AMEX index is primarily concerned with the performance of stocks in that particular market, rather than being geared to represent the overall American markets as a whole.