Among the most commonly followed equity indices is the Standard and Poor’s 500
(S&P 500). The S&P 500 is a stock index that measures the performance of 500
Market capitalization requirement
Among the primary ways of determining the value of publicly traded companies is
market capitalization. A company’s market capitalization is the value of its shares
divided by its total stock price. To be included on the S&P 500 list, a company must
meet minimum market capitalization requirements. This includes being based in the
United States, having a history of positive earnings, and being publicly traded for at
least one year.
Typically, larger companies have a larger market cap. They are also more likely to be
established in their industry. Those that are newer may serve niche markets. They
may also be purchased by a larger company.
The S&P 500 index is a group of 500 companies that represent eleven business
sectors. They are Consumer Discretionary, Energy, Health Care, Materials,
Financials, Communications Services, Real Estate, Industrials, Consumer Staples,
and Technology. Companies in each sector are weighted differently by market cap.
There are a number of different ways to invest in the S&P 500 index. One option is
to purchase an exchange-traded fund, or ETF. Investing in an ETF is a great way to
get exposure to the S&P 500. Another option is to purchase a list of the best
performing S&P 500 stocks.
A company’s market cap is determined by multiplying its outstanding shares by the
price of those shares. The higher the market cap, the more likely it is to be included
on the S&P 500 list. However, some companies are considered large cap even if
their market cap is under $1 billion.
The S&P 500 list is updated on a quarterly basis. If a company is removed from the
list, it is replaced by a company that has a market cap that meets the minimum
requirements. This list includes the top companies in the U.S. The list is also used as
a reference point. However, it may change as share prices fluctuate.
In order to be included on the S&P 500 index, a company must be publicly traded,
have a minimum market capitalization of at least $13.1 billion, and be profitable
over four quarters. Additionally, the company must trade at least 250,000 shares in
the six months leading up to the evaluation date.
Requirements for inclusion
Whether a company qualifies for inclusion in the S&P 500 list or not depends on a
variety of factors. Among them is whether the company has been publicly traded for
at least a year. Moreover, the company must also have positive net income for the
past four quarters. The company also has to file a 10-K annual report.
For instance, a company that makes money by selling fossil fuels may be excluded
from the S&P 500 list. The reason is that managers of institutions see these
companies negatively and the public is not. However, the S&P 500 Committee may
eventually make an exception.
Another consideration is whether or not a company has multiple share classes. Some
companies such as Google and Facebook have multiple classes of common stock.
This can present difficult decisions. However, there is a test to assess whether or not
a company has a multiple class share structure.
Another rule is that a company’s share price must be one dollar per share.
Additionally, the company must have at least 50 percent of its shares “floating” on
stock exchanges. This requirement is especially important when evaluating whether
or not a company is a good fit for the S&P 500 index.
If a company meets all of these requirements, the company is eligible for inclusion
in the S&P 500 list. Companies must also be listed on one of the three major
exchanges. These include the NYSE, Nasdaq, and Cboe. The company must also
have a minimum market cap of $14.6 billion.
In addition to these requirements, the S&P 500 list also disqualifies companies that
are closely held. It also disqualifies companies with a market cap below $8.2 billion.
Also, the company must be listed on one of the three major exchanges, have at least
50 percent of its shares “floating” in public markets, and have been publicly traded
for at least a year.
Companies can be added or removed from the S&P 500 list at any time. However,
they receive no advance warning. In addition, the company must have positive net
income for the past four quarters, and 50% of its fixed assets must be in the United
States. The S&P 500 Committee meets on a monthly basis to evaluate ongoing
corporate actions and make adjustments. It also rebalances the index on a quarterly
Returns over the last year
Despite a rough start to the year, the stock market ended the year on a high note.
As of March 2020, all major indices were back up to where they started the year.
While investors were pleasantly surprised to see gains, the reality is that the stock
market has been a rollercoaster ride since the start of the year.
There are a number of asset classes that outperformed in different cycles. For
example, the investment grade bond market has been on a positive trajectory since
the start of 2020. Meanwhile, emerging markets have bounced back from a two-year
low. Investing in a single asset class can be dangerous, and staying across four or
more asset classes is the best way to ensure healthy returns.
Some of the most impressive returns came from meme stocks. These companies
have generated explosive gains in a short period of time. While they might not
reflect a long-term trend, the companies’ share prices have exceeded the market’s
decline in two of the last three years.
Another impressive return was recorded by Gold. The metal posted a 21 per cent
return last year. However, the market has had more than its share of negative
returns. This includes the fossil fuel-free S&P 500 ETF fund, which has fallen 15.1
percent over the year.
Overall, the S&P 500 has returned an average of 8.077% over the last five years,
which is less than half of the historical average. The S&P 500 also handily beat
inflation over the same period.
The real-world return of the S&P 500 is less impressive, however, since it assumes
that dividends are reinvested. In fact, the historical average yearly return of the S&P
500 is 6.077%, but that number is based on monthly averages.
Looking beyond the numbers, Research Affiliates forecasts a positive real return for
U.S. large caps over the next 10 years. They also predict an impressive real return
for emerging markets equities.
Overall, the stock market has recouped its losses, but it is still up just over 30
percent over the last year. The market has also bounced back from a two-year-low,
with stocks briefly entering bear market territory.
Earlier this month, S&P Dow Jones Indices announced a policy change that will
exclude companies with multiple share class structures from the S&P Composite
1500. This decision is not expected to impact existing index constituents, as the new
rule is not retroactive. Nonetheless, the decision illustrates growing roles for index
providers in shaping corporate governance standards.
As index providers work to update their indices to include ESG criteria, they are also
shaping corporate governance standards. Index providers are also concerned that
the number of companies utilizing multi-class share structures is increasing. They
are addressing this concern through new rules, which will be effective on September
semi-annual reviews. During this review, existing constituents will be allowed to
amend their capital structures to comply with the new rule. IPOs and potential new
constituents will also be subject to the rule. This rule will apply to all indices, and a
new threshold will be reviewed annually.
Multi-class share structures allow founders of public companies to maintain control.
However, the structure is also subject to scrutiny as it can limit the capital structure
of companies. It also can limit the number of public shareholders with voting rights.
This new rule will require public shareholders to have at least 5% voting power. This
will help issuers to implement differentiated voting rights.
FTSE Russell announced its final ground rules for indices on August 25. It requires
public shareholders to have at least 5% voting rights, and will apply to IPOs and
potential new constituents. The rule will also apply to quarterly reviews. On a yearly
basis, FTSE Russell will also sanction companies that fail to comply with the new
Companies that fail to comply with the new rules are excluded from FTSE Russell’s
indices. This rule is expected to apply to IPOs and potential new constituents, and
will also apply to existing constituents during semi-annual reviews. Nonetheless, the
decision leaves substantial latitude for issuers to implement differentiated voting
Companies in the index are screened to exclude those with low scores relative to the
United Nations Global Compact Scores. In addition, companies are excluded from
the index if they are doing business activities that are prohibited by Sharia.