This article explains what makes the S&P 500 Index stand out among other indices. Before we elaborate on the S&P 500, however, a short definition of an index is in order.
An index is a method to evaluate the performance of a group of assets. As a rule, indices measure the performance of a group of securities meant to replicate a specific area of the market. These can be so-called broad-based indices tracking the whole market. Indices can also be more specialized, evaluating a specific industry or a segment.
What Is the S&P 500 Index?
The index under discussion is called the Standard & Poor’s 500 Index, or the S&P 500 for short. It is an index of the 500 largest US companies which are traded publicly. The index is market-capitalization weighted; that is, it is a type of index where its individual components are included in amounts corresponding to their total market capitalization, shortened as “market cap”.
What Companies Are Eligible for S&P 500 Inclusion?
Note that the S&P 500 is not a list of exactly 500 US companies by market capitalization, since there are other criteria by which companies get included in the index. To be eligible for S&P 500 index inclusion, a company should satisfy the following criteria:
- Be a US company;
- Have a market capitalization of at least USD 11.8 billion;
- Be highly liquid;
- Have a public float of at least 10% of its shares outstanding;
- Its most recent quarter’s earnings and the sum of its trailing four consecutive quarters’ earnings must be positive.
What Companies Are Listed on the S&P 500?
The S&P 500 Index is viewed as the best gauge of large-cap US equities. The Index does not provide the full list of 500 companies, many of which include technology companies and financial businesses. The top ten S&P 500 companies by Index weighting are the following:
- Apple (AAPL), index weighting is 5.9%.
- Microsoft (MSFT), index weighting is 5.4%.
- Amazon.com, index weighting is 4.2%.
- Facebook, (aka Meta Platforms) (FB), index weighting is 2.2%.
- Alphabet (GOOGL), index weighting is 2.0%.
- Alphabet (GOOG), index weighting is 2.0%.
- Tesla (TSLA), index weighting is 1.5%.
- Berkshire Hathaway (BRK.B), index weighting is 1.5%.
- JPMorgan (JPM0, index weighting is 1.3%.
- Johnson & Johnson (JNJ), index weighting is 1.2%.
While many of these above-mentioned companies may be household names, broad popular familiarity is not a requirement. That means that the index also includes lesser-known companies, so long as they meet the criteria for index inclusion.
What Is Inside the S&P 500 Index?
There are eleven sectors included in the S&P 500 Index, according to the Global Industry Classification Standard:
- Consumer Discretionary
- Consumer Staples
- Health Care
- Information Technology
- Communication Services
- Real Estate
These sectors are further divided into 24 industry groups, 69 industries, and 158 sub-industries. The S&P 500 represents more than 83% of the total domestic U.S. equity market capitalization. The S&P Composite 1500, which comprises the S&P 500, S&P MidCap 400, and S&P SmallCap 600, represents over 90% of the S&P TMI (Total Market Index).
History of the S&P 500
The origin of the S&P 500 goes back to 1923 when Standard & Poor’s introduced indices that included 233 companies spread over 26 industries. The S&P 500, as it is now known, was introduced in 1957. The S&P 500 is regarded as a proxy for the U.S. equity market. It is the only stock market benchmark serving as an economic indicator in The Conference Board Leading Economic Index. It has stood for U.S. stock market performance in that context since 1968.
S&P 500 Index Construction
In order to calculate the market capitalization of a company, one needs to multiply the current stock price by the outstanding shares; that is, those shares that are shown on a company’s balance sheet under the heading Capital Stock. Note that the S&P only uses free-floating shares or the shares that are traded by the public. The S&P 500 adjusts each company’s cap to compensate for the issues of new shares or companies’ mergers. The value of the index is calculated by totaling the adjusted market caps of each company and dividing the result by a divisor.
Investors can calculate how much a particular company weighs in the index. This information is important: if a stock jumps or sinks, investors, by calculating its weight, can understand whether it might have an impact on the S&P 500 as a whole. A company with a 15% weighting will affect the value of the S&P 500 more than a company with a 1% weighting.
S&P 500 Most Recent Rebalancing
The S&P 500 was rebalanced last time on March 12, 2021. The rebalancing was brought into effect on March 22, 2021, before markets opened. NXP Semiconductors (NXPI), Penn National Gaming (PENN), Generac Holdings (GNRC), Caesars Entertainment (CZR) were included on the list of S&P 500 companies. Xerox Holdings (XRX), Flowserve (FLS), SL Green Realty (SLG), and Voter (VNT) were crossed out of the list.
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In what follows, we are explaining why and how earnings per share (EPS) are calculated. As EPS is a widely used metric for estimating corporate value, understanding this concept is useful and important. In investors’ eyes, a higher EPS indicates a larger value: they will pay more for a company’s shares if they think the company has higher profits relative to its share price.
What Is Earnings Per Share (EPS)?
Earnings per share (EPS) is calculated as follows: a company’s profit gets divided by the outstanding shares of its common stock. The number that you get by these calculations shows how profitable a company is. The higher a company’s EPS, the more profitable it is thought to be.
How Is EPS Calculated?
Earnings per share value are calculated as net income, i.e. profits or earnings, divided by available shares. If you want to make a more refined calculation, adjust the numerator and denominator for shares that could be created through options, convertible debt, or warrants. Note also that the numerator of the equation is also more relevant if it is adjusted for continuing operations.
When you want to calculate a company’s EPS, you need to obtain its balance sheet and income statement. Use them to find the period-end number of common shares, dividends paid on preferred stocks, if they exist, and the net income or earnings. But note that your calculations will be more precise if you use a weighted average number of common shares over the reporting term because the number of shares can change over time.
Remember to include in the calculation of the weighted average number of shares outstanding any stock dividends or splits. You may also simplify the calculation by using the number of shares outstanding at the end of a period.
How Is EPS Used?
You cannot determine a company’s profitability on an absolute basis without EPS. It is one of the most important metrics employed in determining how much the company is worth. EPS is also an important component of calculating the price-to-earnings (P/E) valuation ratio. “E” in “P/E” is EPS. When you divide a firm’s share price by its earnings per share, you will see how much the market is willing to pay for each dollar of its earnings.
EPS is also useful if you are looking to choose stocks in which to invest. Interactive Traders can help you choose stocks with high EPS and explain how to invest in them. We will show you how to compare EPS with the share price of the stock so that you can determine the value of earnings with precision and gauge how investors feel about your chosen stock’s future growth.
What Is the Difference between Diluted EPS and Basic EPS?
Basic EPS is the company’s net income divided by its outstanding shares. When you read about companies’ profits, this is the figure you usually see in reports about them. As its name suggests, basic EPS is the simplest definition of EPS. Diluted EPS, by contrast, includes a more complex definition of the company’s shares outstanding. Diluted EPS is, therefore, is lower than or equal to the basic EPS. Diluted EPS includes shares that are not presently outstanding but can be so if stock options and other convertible securities are exercised.
What Is the Difference between EPS and adjusted EPS?
As its name suggests, adjusted EPS is a type of EPS calculation in which the analyst makes some adjustments to the numerator. Usually, analysts would add or remove components of net income considered non-recurring. Suppose a company’s net income grew because of one single successful sale. In this case, analysts, seeing that the sale was not recurring, might deduct the proceeds from this sale and, in doing so, make the company’s net income smaller. If this happens, adjusted EPS would be lower than basic EPS.
Some Limitations of EPS
There is a caveat when you look at EPS to make an investment: this measure has drawbacks. There are certain ways to play with EPS: companies buy back stocks, reduce the number of shares outstanding, and even increase the EPS number, even though the level of earnings remains the same. Also, note that EPS does not take into account the price of the share. Hence, by looking at EPS, you cannot understand whether a company’s stock is overvalued or undervalued.