The S&P 5001 is one of the most widely used measures of stock market performance. The expression "S&P" refers to Standard & Poor's, the firm that decides which companies will be included in the Index; "500" refers to the number of stocks the Index contains.
Instead of just choosing the 500 largest companies, Standard & Poor's selects those that are among the leaders in the major industries driving our economy. Each stock in the S&P 500 Index receives a weight, based on the total market value of all the shares currently owned by investors. Companies with higher stock prices and more shares receive a greater weight than companies with lower prices and fewer shares.
While the Index itself is unmanaged, its makeup is adjusted from time to time to reflect changes in company ownership, financial strength, or economic importance.
The S&P 500 Index represents approximately two-thirds of the market value of all U.S. common stocks. Because of its size and the companies it includes, the Index is generally considered to be representative of the large-cap U.S. stock market as a whole.
Economists use the Index as one of many indicators of where the economy may be moving. They consider the value of the S&P 500, along with other factors, to spot turning points and project economic growth or slowdowns that may lie ahead.
A benchmark is a standard against which you measure something else. The S&P 500 is a meaningful benchmark to investors because it generally reflects the movements of the stock market as a whole. Since few investors own that many stocks, they may want to compare their holdings to overall market performance.
Comparing your investments to the S&P 500 can tell you how they performed relative to the stock market as a whole over specific periods. Many factors may affect stock prices, including economic forces, industry trends, investor perceptions, and individual company performance. A specific company's results may differ from the market as a whole because of its sales, earnings, management, competition, or other factors. If you invest in mutual funds, your results may depend on the fund's objective, security selection, and management style.
For example, a bond fund may generally have lower returns than a stock fund since its primary objective is usually income rather than growth. In addition, mutual funds carry fees and expenses that don't apply to an index. So even if a fund seeks to reflect the performance of the stock market, an index may have higher total returns.
When the stock market does well, many people assume it's a good time to buy. But since S&P 500 data is always from the past, it cannot tell you how your investments will do next week, next month, or next year. Nor can the S&P 500 tell you if particular equity or mutual fund investments—or stocks in general—are appropriate for your personal situation. That will depend on your investment objectives, risk tolerance, how long you plan to stay invested, and other factors.
The S&P 500 is just one of many performance benchmarks. Other indexes or averages may contain a different number or type of securities, include domestic or international issues, or focus on specific market sectors.
_20.gif){kind=small}
