Trading S&P 500
What is the Standard & Poor’s 500 Index? The S&P 500, as it is abbreviated, is a reflection of the performance of the top 500 stocks of leading companies selected by economists in the USA, and is listed on the NYSE (New York Stock Exchange) and NASDAQ (Nasdaq Exchange).
With over $7.8 trillion ‘owned’ to the index, its assets comprise of approximately $2.2 trillion in total, of which make up 80% coverage of the available market capitalisation.
The index components and weightings are determined by S&P Dow Jones Indices, although the S&P 500 still shows up in a differentiation and advantage over other indexes such as the Dow Jones Industrial Average (DJIA), Russell 2000 index or the Nasdaq Composite (three other popular indexes) due to its weighting methodology and is diverse number of constituencies.
S&P 500 History
In 1975 Standard & Poor’s introduced the S&P 500 as a market index to track the value of the 500 largest companies listed on the New York Stock Exchange and the Nasdaq Exchange. Opening at 386.36 on the 1st of January, 1975, the index rose to nearly 700 within its first decade, which was the tail end of the economic boom, seeing the close of WWII.
After 20 years of seeing such highs, in late 1981 the index started to decline and fell to a devastating 300. A major contributor to the replenishing of the index was the interest rate hike by the Federal Reserve between 1982-2000, recovering it to 1,350%.
In 2000 the stock markets experienced a ‘bubble’ due to many people that were entering into middle class status, technology was improving, there was a stable economic climate which lead to an increase in the quality of life around the globe. Most speculators say that this was due to the developments in the technology sectors and hype surrounding the thriving in worldwide web and internet.
Eventually the bubble burst, as technology heavily impacted the Nasdaq by up to 90% the S&P 500 fell in 2002 again to 40%, bringing it to the lowest value since inception. The S&P 500 managed another recovery in 2007, reinforced by financial and commodity stocks, plus the lower housing prices.
Unfortunately, with debt defaults created by the lowering housing prices this sent the financial system on a downward spiral and impacted the S&P 500 who finally hit its all-time low in March of 2007 and experiencing a drop of 57%. Recovery took the index 6 years and has now climbed by 200%.
S&P 500 Index composition
All the components of the S&P 500 are weighted on a free float market capitalisation, where the larger companies influence and affect the total value of the index to a large degree.
As of March 2015 for example, the sum of the market capitalisation of the companies that comprise the SP500 was $18.5 trillion. While, the largest member was Apple Inc. that contributed $720 billion in contrast to the smallest member Diamond Offshore Drilling (DOD), with a value of $3.65 billion.
Obviously, changes in the Apple stock price affected the overall index by almost 200 times more than that of the DOD due to its portion of the index. Apple makes up 4% of the index and Diamond Offshore Drilling a mere 0.02%.
The companies of the index are chosen by a committee at Dow Jones S&P Index, the organisation is determined to ensure a positive reflection of the US economy and for this reason only selects the best. Based on the changes in the economy companies are dropped or added.
The S&P 500 charts are an easy accessible indication of how the stock markets and economy are performing, at a glance.
|Companies||Index weighting (%)|
|Exxon Mobil Corp||3.1172%|
|Procter & Gamble||1.8204%|
|General Electric Co||1.7028%|
|Intl Business Machines Corp||1.6814%|
|Johnson & Johnson||1.6238%|
|JP Morgan Chase & Co||1.6101%|
Factors that influence the overall index price
There are many factors that influence the S&P 500’s index price, both locally (in the USA) as well as from a global economic standpoint. With various country-wide economical shifts such as major events that happen almost monthly they will have an impact, such as the US Election that has just concluded in 2016.
Brexit for example, and other political events have the ability to change market sentiment and this lends itself to changes in the index price. Such events should be monitored during index CFD trading online.
Another factor that will influence this index is in the import and export industry directly connected to supply and demand both locally and globally. Most investors that trade on this index need to keep abreast of the internal and external changes that will influence and affect even the smallest market move.
Ensure you follow the economical benchmark changes that have a direct influence on the US stocks and indexes such as: Employment and unemployment rate, Gross Domestic Product figures, Interest Rate hikes or decreases, import and export regulations, political changes, the dollar index, etc. Major announcements and events can also be found updated on our economic calendar.
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S&P 500 Trading Main FAQs
- What is the S&P 500 Index?
The S&P 500 is a market capitalization weighted index of the 500 largest publically traded companies in the U.S. It is also float adjusted, meaning the weight of each individual company is determined by a combination of market capitalization and the number of shares outstanding. It is widely regarded as the best gauge of the large-cap U.S. equity market. The S&P 500 includes companies from every industry, however the financial sector is particularly well represented.
- Should I trade the S&P 500 Index?
With the S&P 500 considered as the best gauge of the U.S. large-cap equity market because of its breadth and depth, it makes perfect sense for every trader to consider trading in the S&P 500. These characteristics also mean that technical indicators and trading signals are often very clear on charts of the S&P 500. This makes the index more reliable and in some cases easier to trade than other U.S. equity indices. And because it is extremely liquid traders will find tight spreads that make it easy to enter and exit trades.
- What is the best strategy for trading the S&P 500 Index?
First of all, it can be helpful for traders to determine the overall direction of the market, and only trade in that direction. One excellent way to do so is by using the 200-day moving average. If price is above that average only take long trades, and if price is below that average only take short trades. Following that traders can look for any number of technical indicators or price patterns to set up a trading strategy. This strategy can and will also change over time as different market conditions call for different trading strategies.
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