Standard & Poor's 500 Stock Index
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Standard & Poor's 500 Index
A stock market index tracking 500 companies in various industries with a large amount of market capitalization. It is a capitalization-weighted index, meaning that stocks with higher market caps affect the average more. The companies included on the S&P 500 are decided by committee and are updated periodically. It also scales its averages to account for stock splits and other changes in the companies tracked. Next to the Dow Jones Industrial Average, it is considered one of the premier securities indices in the United States. Some exchange-traded funds, notably SPDRs, track the S&P 500.
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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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.