Why Should I Care About the S&P 500?

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S&P 500

The S&P 500 is one of the most widely followed indices by investors across the world. The Standard and Poor’s 500 index, published since 1957, represents the prices of 500 large cap stocks trading on the New York Stock Exchange (NYSE) and the NASDAQ. These stocks belong to companies that play a key role in the development of the US economy and are from different industries.

The index is regularly monitored for its ability to provide a good indication about the way the US stock market is moving. The basic criteria for the inclusion of a company’s stock in the S&P 500 is its gross revenues, besides the volume and liquidity of its stock. The index plays a strong role in the daily outlook and foreign exchange prices of the USD against a basket of currencies.

Why is it Important?

The S&P 500 is a key indicator of the health of the top US companies from different industries and thus the overall US economy. It is important for traders to follow the movements of this index, since:

  1. It includes the top companies of the US. For inclusion in the S&P 500, a company must be located in the United States and have a market cap of at least $5.3 billion. At least 50% of the company’s stock must be available to the public and its stock price must be at least $1 per share. Finally, it must have at least four consecutive quarters of positive earnings.
  2. S&P 500 is considered one of the most accurate and trustworthy indicators of the US economic situation because of its diversified sector coverage and market value weighting. The index is updated during trading sessions every 15 seconds. Important adjustments include stock splits, restructuring events, replacements of companies due to migration outside the US (adjustment after close of trading).
  3. It is easier to track the movement of an index rather than each company individually.
  4. Besides being a strong indicator of the US economy, the S&P 500 also has strong correlations with other markets.

The S&P 500 is used by mutual funds, hedge funds and even pension funds as a benchmark to track their own performance. Trading in the S&P 500 is accessible,  besides offering access to the top 500 companies in one go. Since the index is an average of not one but 500 stocks, volatility is lower than when trading in individual stocks. We have gone into a bit more detail about other financial instruments should you wish to explore more.

How to Trade the S&P 500?

The best way to trade the S&P 500 is to open a trade account with a reputable broker, plan out the strategy you wish to use for getting into and out of a trade and set goals. A good vehicle for trading is the ES mini, which is a futures contract tied to the movement of the S&P 500, because of high liquidity.

Apart from the S&P futures, investors can also track the index by investing in the SPY exchange traded fund or ETF, which is an investment fund tracking the S&P 500 stocks. Lower fees and high liquidity are the benefits of trading in SPY ETF. However, one thing that traders need to remember is that the S&P 500 will not move as much as individual stocks.

Some professional traders prefer to trade the VIX, which tracks the volatility of the S&P 500 rather than its overall direction. Traders can also use the weekly options on the SPY ETF or E-mini Futures for speculation and hedging purposes.

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