Standard & Poor's 500 Stock Index

Standard & Poor's 500 Stock Index (S&P 500)

An inclusive index made up of 500 stock prices including 400 industrials, 40 utilities, 20 transportation, and 40 financial issues. The index is constructed using market weights (stock price multiplied by shares outstanding) to provide a broad indicator of stock price movements.

Case Study Being added to a popular stock index such as the S&P 500 can have a positive effect on a company's stock price. For example, the common stock of Federated Department Stores experienced heavy trading and jumped in price by nearly 9% in the four days following Standard & Poor's announcement that the firm would add Federated's stock to its widely followed index. Most of this activity was apparently generated by index funds holding portfolios that mimic the indexes. Thus, the announcement by S&P caused index funds to begin adding the stock to their portfolios. Likewise, dropping a stock from an index is likely to have a negative effect on its price. Most of the seemingly unusual returns that result from adding or deleting a stock from an index can be expected to occur between the day of the announcement and the day when the stock is actually added to the index.