Warren Buffett, the legendary stock market investor, famously stated that a low-cost S&P 500 index fund is the best investment most people can make. It's easy to understand why. The S&P 500 has provided annualised total returns of 9% to 10% over lengthy periods of time, and you can easily participate in a passive S&P 500 fund for virtually no cost. Let us understand it in detail.
What is S&P 500?
The S&P 500 (also known as the Standard & Poor's 500) is a trademark of the S&P Dow Jones Indices joint venture. It is a stock index that includes the 500 largest firms in the United States and is often regarded as the greatest measure of how the stock market in the United States is performing overall.
From a different perspective, the S&P 500 is a quantitative indicator of the performance of America's 500 largest stocks as an index. It is a standard benchmark against which portfolio performance can be measured.
How to invest in S&P 500 ?
You can't directly invest in the S&P 500, but you can invest in individual firms that are part of the index. You can also invest in S&P 500 index funds, which are meant to closely track the S&P 500's performance.
Which companies are included in S&P 500?
To be included in the S&P 500, companies must have an unadjusted market capitalization of at least $13.1 billion. They must also meet certain liquidity and profitability requirements.
How is S&P 500 calculated?
The market capitalisation of the companies in the S&P 500 index is tracked by the index. The entire value of all shares of stock issued by a corporation is known as its market cap. It's computed by multiplying the stock price by the number of shares issued.
A corporation with a market capitalization of $100 billion will be represented ten times as much as a company with a market capitalization of $10 billion. As of January 2022, the S&P 500 had a total market cap of $34 trillion.
Each of the index's 500 companies is chosen by a committee based on liquidity, size, and industry. The index is rebalanced every three months, in March, June, September, and December.
What are the limitations of S&P 500?
When stocks in the S&P and other market-cap-weighted indexes become overpriced, meaning they rise higher than their fundamentals warrant, one of the index's restrictions occurs. When a stock has a large weighting in an index yet is overvalued, the stock inflates the index's total value or price.
A rising market valuation isn't always indicative of a company's fundamentals; rather, it indicates the stock's increase in value relative to outstanding shares.
How is S&P 500 different from the Nifty 500?
When it comes to stock portfolios, the bigger the canvas, the more diversification across sectors and market capitalization you'll obtain. A portfolio of stocks from the Nifty 500 and SP 500 will be enough for an investor.
While the Nifty 500 represents the top 500 domestic companies across 20 industries, the S&P 500 represents roughly 500 prominent corporations across 11 industries and is often regarded as the most important single indicator of large-cap US stocks.
If you have the time, knowledge, and willingness to properly analyse stocks and manage a portfolio, you can certainly outperform the S&P 500 over time.