The S&P 500 index is recognised as the primary measure of the development of the US economy and market sentiment. The index is watched by analysts from all over the world.
The Standard and Poor’s 500 index is recognised as one of the key measures of the strength of the US economy. The index has an average annual return of almost 14% which encourages many investors. Investing in the S&P 500 is considered an expression of faith in the American economy and success.
One of the most popular investors who have made a fortune with the S&P 500 is Warren Buffet, who began investing in American businesses back in the 1960s by buying a then-newly created fund that tracked the behaviour of shares in 500 large American companies. Buffet argued his decision with a belief in the 'strength' and 'growth' of the American economy as the one with the most capital and the so-called 'smart money'. The stock market, however, is accompanied by emotions and the index can also experience volatility. This is why financial derivatives such as futures based on the S&P 500 price have become popular over the years.
In this article, we will describe what the S&P 500 index actually is, how it is constructed and how to start trading and investing in it.
What is the S&P 500 index?
The S&P 500 Index is an index that tracks the market capitalisation of 500 constituent companies by measuring the value of their shares admitted to public trading (free float). The index as we know it today was created in 1957, although the work to create such an index continued later on.
The market capitalisation of each company is calculated by multiplying the number of shares by the current share price. If a company has 5 million shares currently held by shareholders and the current share price is $400, then the market capitalisation (or value) of the company is $2 billion. Put simply, the value of the company is $2 million. If we add the market capitalisation of all the companies listed in the index, we get the total value of the index.
However, it should be taken into account that each company in the SP500 has its own specific weight, obtained by dividing the individual market capitalisation of the company by the total market capitalisation of the S&P 500. Therefore, it is the largest companies that have the greatest influence on the value and quotation of the index.
Index S&P 500 companies sector’s:
- Information technology: ca. 28%
- Health care: ca. 13%
- Consumer discretionary: ca. 13%
- Financials: ca. 11.0%
- Communication services: ca. 11%
- Industrials: ca. 8%
- Consumer staples: ca. 5.5%
- Energy: ca. 3%
- Real estate: ca. 2.5%
- Materials: ca. 2.5%
- Utilities: ca. 2.5%
S&P 500 origins
The history of the index began with Henry Varnum Poor, who founded Poor's Publishing in 1860 and published an investor's guide to the railway industry, which was an innovation at the time (a well-known case of a speculative bubble on railway companies). In 1923, the Standard Statistics Company began rating mortgage bonds and created an index that included 233 US companies and was calculated weekly. Three years later the company developed an index of 90 companies and began to introduce daily quotations. In 1941, Poor's Publishing underwent a merger with Standard Statistics - Standard & Poor's, known today by its acronym S&P, was formed.
On Monday, 4 March 1957, the index was expanded to track the performance of 500 large US companies. The name was changed to the S&P 500 Stock Composite Index. Companies such as AT&T, General Motors, Exxon Mobil, U.S Steel, General Electric and Ford Motor accounted for the strength of the index at the time.
How does S&P 500 work?
Like other indices managed by Standard and Poor’s, the constituents of the S&P 500 Index are selected by a special committee according to established rules.
The committee uses eight basic criteria to assess a company's value: market capitalisation, liquidity, domicile, public float, Global Industry Classification Standard (GICS) and representation of industries in the US economy, profitability and the length of time publicly traded on a stock exchange. Moreover, the company's board of directors must be public.
Specific requirements are:
- Market capitalisation greater than or equal to $13.1 billion.
- Annual dollar value traded to market capitalisation adjusted for the number of shares duplicated greater than 1.0.
- Minimum monthly trading volume of 250,000 shares in each of the six months preceding the date of the committee's decision.
- Publicly listed on the New York Stock Exchange NYSE or NASDAQ.
- The company should be of US origin.
- The following are not eligible for the index: limited partnerships, master limited partnerships, investment trust units, OTC Bulletin Board issues, closed-end funds, ETFs, ETNs, royalty trusts, tracking stocks, preferred stocks, unit trusts, equity warrants, convertible bonds, investment trusts, American depositary receipts and American depositary shares.
- As of 2017, companies with two or more share classes are not added to the index (currently listed companies with two classes include. Berkshire Hathaway and Alphabet).
- The index is reconstructed quarterly to remain a reliable indicator of the growth of the US economy
Long position on the US500
A long "BUY" position is particularly popular when the market is in a good mood and investors feel safe, or when external circumstances arise that can bring positive sentiment back into the market. This is when a rebound can be particularly dynamic.
In such a situation, if we assume that the US economy may experience an improvement in investor sentiment following some economic or political event, we may take a long position on the US500. Usually risk-loving investors are very quick to return to their investments as soon as there is positive sentiment for the market. The US stock market has proven time and time again that it can recover even from the biggest upsets. That is why buyers are so quick to appear on it.
If market sentiment actually improves, your predictions can be correct and you can make a profit by betting on the US500 rising. Conversely, if you were to take a long position and the market feared a decline, your position would most likely take a loss.
A short position on US500
A "SELL" short position is particularly popular when there is fear and uncertainty in the market or when there are external circumstances that could cause negative sentiment to return.
In such a situation, if you assume that the economy may experience a sharp deterioration in investor sentiment following an economic or political announcement, you can take a short position on the US500. You can also take a short position if you believe the condition of the US economy will deteriorate in the near term. In this way you can play out trading strategies for specific world events that may increase the volatility of stock prices and ultimately the indices.
If fear is indeed present in the market, your prediction will most likely be correct and you can make a profit by betting on the US500 price falling. Conversely, if you take a short position and the market rises, your position is likely to record a loss.
Best time to start trading S&P 500
The S&P 500 index price tends to make relatively small action in comparison to NASDAQ. These are mostly well known, big companies like Berkshire Hathway or Microsoft, so volatility is not very high. But in periods of panic or unstable situations in the world, investors usually leave risky assets for some time and turn to more stable investments, such as gold or cash. So even the safe haven indexes like S&P500 can have big 10 percent or more selloffs. Growth is calmer than selloff. When the index grows and the economy is good, the prices are constantly growing. This can be attributed to macroeconomic factors that are causing investors to return to investments.
Standard & Poor’s index is listed for biggest and transparent companies providing important products and solutions for countries all around the world, like some of the biggest banks (f.e. JP Morgan, Bank of America, Citi Group, BB&T, Bank of New York Mellon or Goldman Sachs), producers (f.e. Coca-Cola Company, Pfizer, Johnson & Johnson, Procter & Gamble) or even technology companies (f.e. Microsoft, Apple, AT&T, Visa, Nvidia).
Past performance is not necessarily indicative of future results, and any person acting on this information does so entirely at their own risk.
The SP500 index tends to rise when interest rates remain low. A large proportion of investors then look for rewarding returns in a risky equity market. The stock market usually reacts nervously to news of an interest rate hike by the Fed.
Despite higher volatility and risk, NASDAQ usually provides higher returns even than the S&P 500 index. Therefore, it can be said that some NASDAQ traders accept higher volatility at the expense of potentially higher returns.
It is certainly a good time to be interested in the S&P 500 index trading during panic periods, which cause a strong sell-off. American businesses used to recover fast after panic situations. A large number of contrarian investors looking for a trend reversal may take important long 'BUY' positions in anticipation of a price rebound. Similarly, in the case of euphoria when the index is at historic highs, risk averse traders may look for a period of weakness in global markets to take short 'SELL' positions on the S&P 500, betting on declines.
Interesting times to start trading S&P 500 are when the largest companies in the index release their quarterly or full year financial results, as well as world events that can cause high volatility, such as FED meetings, major political meetings or various military crises.
How to start trading S&P 500 (US500)
S&P 500 trading is available on our xStation trading platform and you can start trading some of the American largest companies by entering into CFD (contract for differences) transactions on the US500 instrument and use the full leverage potential.
By trading US500 you can take advantage of market volatility and open positions during very fast price movements. Leverage is very risky and can multiply your losses, but at the same time it can also multiply a day trader's profits. Trading US500 is dedicated to active traders who have no problem with market volatility.
Thanks to the 1:20 leverage, you only need a 5 % margin to open a position. By investing USD 1000, you can open a position which is worth USD 20,000. Because of leveraged CFD instruments, high risk level potential revenue of the position also can be high, but as a result, the potential loss is possibly higher as well. US500 CFD trading gives traders the opportunity to open short and long positions. Short positions give traders the opportunity to make profits when emission prices are falling.
If you want to read more about CFDs and financial leverage, please consult our article on leverage.
The only fees you incur for such trading are spread (the difference between buying price ASK and selling price BID) and swap points. The spread is very small and costs cents depending on the size of your position. Swap points are the costs the broker incurs to fund leveraged positions; swaps are charged daily to the open position on the US500 instrument.
By trading emission contracts, you can take advantage of market volatility and open positions during very fast price movements. Leverage is a high risk instrument and may incur losses, but can also multiply a day trader's profits.
Trading US500 is speculative and suitable for active traders only, as price fluctuations matter on this instrument. This type of contract is a financial agreement which pays out the difference in settlement price between open and closed transaction without any physical delivery of the traded instrument.
Online trading allows you to start trading S&P 500 without leaving your home, with zero commissions and low spreads. Moreover, due to the very high liquidity of the S&P 500 you can close your position with one mouse click at any time when the market is open. This is why online contracts trading has so many advantages and is becoming increasingly popular.
Investing in S&P 500
Trading with leverage on indices carries a high risk, but well taken positions can give high returns on such investment as well. Companies that debut on the S&P 500 often see increases because mutual funds that track the index are required to buy their shares.
For investors who are not very active and prefer only passive investment in the 500 largest American companies, we also offer ETFs giving exposure to the S&P 500 index such as:
- Accumulating ETF iShares Core S&P 500 CSPX.UK
- Distributing ETF iShares IDUS.UK (dividend)
- SPDR S&P 500 ETF SPY5.UK
- Beta ETF S&P 500 ETFBSPXPL.PL
You can also invest in ETFs on specific S&P 500 branches like:
- Communication sector ETF S&P 500 iShares IUCM.UK
- Consumer discretionary ETF S&P 500 iShares IUCD.UK
- Energy sector S&P 500 ETF iShares IUES.UK
- Financial sector S&P 500 ETF iShares IUFS.UK
- Information technology sector S&P 500 ETF iShares QDVE.DE
- Utilities ETF S&P 500 iShares IUUS.UK ETF
You can read more about ETFs here.
We also offer shares of companies listed on S&P 500 including Apple AAPL.US, Microsoft MSFT.US, Amazon AMZN.US or Berkshire Hathaway BRKA.US and many other technology companies.
S&P 500 (US500) index price
The S&P 500 is well known as a very volatile instrument and the price can do big moves at any moment. That's why keeping track of the S&P 500 quotation is very important for traders. On xStation, we provide real-time quotes for future contracts on S&P 500 by offering US500 instrument.
S&P500 (US500) Trading hours
What about the available S&P 500 (US500) trading hours? This information is especially important for day traders. US500 trading is available 4 days per week from 00:05 CET to 23:00 CET with a short break between 22:15 CET to 22:30 CET from Monday to Thursday, and from 00:05 CET to 22:00 CET - on Friday. Trading US500 is not available during weekends on our platform. The US500 price is static when the market is closed. At all other times the prices are constantly fluctuating.
Of course the best time to start active S&P 500 trading is during periods of very high volatility when investors feel extreme emotions and high volume enters the market. When fear or greed is in the market, index volume increases. This situation is a big opportunity for active and risk prone traders, who are using leverage to take profits on long but also on short positions.
Increasing fear could be influenced by publishing negative political or macroeconomic news. S&P 500 is not a very volatile instrument, but leverage makes trading it riskier and more volatile. The index consists of 500 large American companies. Shares of these companies are usually not very volatile because of their large market cap, market position and fundamental value. But when fear of the stock market increases even large companies start to fall. This happens usually because the stock market in general is a risky investment. In moments of crisis situations investors close positions on risky assets. These factors can create a feeling of fear in investors, and this is always a sign of big moves on the American economy. But upwards market price moves can be also as dynamic when investors believe that the economy is stabilising; feeling safe they use to return to risky investments and large companies to buy with bargain.
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