Advanced Forex Blog

A Deep Dive Into The S&P 500 Sectors

August 10, 2019 | 6:00 am | Advanced Forex Blog
August 10, 2019 | 6:00 am
Advanced Forex Blog
S&P 500 Sectors

What is the S&P 500, how exactly does it work, and how can you apply it to forex?

Following up on our deep dive into the NASDAQ stock market, today we’ll be taking a close look at the S&P 500 Sectors and the SPY500 Futures. 

The S&P 500 index is an American stock market index based on the capitalization of 500 large companies that have common stock listed on the NASDAQ and NYSE (New York Stock Exchange). The index is one of the most frequently followed equity indicators as many traders consider it the best depiction of the US stock market. 

 

Which Companies Are in it?

As the name suggests, the S&P 500 is made up of the 500 largest-cap US stocks. Combined, these stocks account for 80& of all US market capitalization. This is the primary reason why, as we stated earlier, the index is considered such a good barometer of how US markets are performing. 

In order to be listed on the S&P 500, companies need to meet several minimum criteria to even be considered. First, the company must be a US company. Next, their market cap must be $5.3 billion or more. The public float must be made up of at least 50% outstanding shares. The most recent quarter must show positive earnings, as well as over the four most recent quarters. The stock must trade for a reasonable price and must have an active market. 

Currently, the 10 largest companies listed in the index are Apple, Microsoft, ExxonMobil, Johnson & Johnson, General Electric, Amazon.com, Facebook, Berkshire Hathaway, AT&T, and JPMorgan Chase. 

 

s&p 500 companies by weight

As we explained at the beginning of the article, the index is weighted according to market capitalization. 

This means that the part of the index represented by each company is relative to its market capitalization. Apple, for example, is the largest part of the index. Its market cap is approximately 2.9% of the index total. Therefore 2.9% of the index is based upon Apple’s performance alone. 

In contrast to this model, an index like the Dow Jones Industrial Average is based on price. We’ll go deeper into that in the coming days. 

 

How to Put Your Money in the Index

While it’s possible to invest in all 500 stocks listed in the index, it’s probably not the most practical move you can make as an investor. It is, however, possible to get exposure to all 500 by investing in an S&P 500 index fund. 

Like we discussed in the previous article on NASDAQ, these funds come as mutual funds or ETFs. 

 

Applying the S&P to Fx Trading

The reason it’s wise for Forex traders to keep their eyes on the S&P is that it’s such a good gauge of the US economy. 

Unlike the Dow which only indexes 30 companies and is based on a price-weighted system, the market-cap-weighted S&P system is a much better tool for judging the health of an economy because the larger companies have a larger influence and sway on the index. 

Another reason to look at the S&P as a benchmark is because the parts of the index are updated every 3 months. This quarterly update guarantees that the index is an accurate representation and reflection of the state and health of the large-cap market. 

 

The Drawbacks

The S&P 500 sectors do not reflect the values of bonds, precious metals, or cash. So if you’re an investor with a wide variety of assets, this index will not give you an accurate view of your entire portfolio’s health. The index also does not include companies outside of the United States. 

 

Incorporating the S&P into Your Trading Routine

Like all other indices or indicators, the S&P makes up only a portion of the available information. The index, combined with other resources can give you a holistic view of the markets and the directions they’re heading in. Take all of these resources into consideration together in order to have the best view of where your money is and might be headed to.

Here is A look into the S&P 500:


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