A Beginner's Guide to the S&P 500

A Beginner's Guide to the S&P 500

Reading time: 6 minutes

Serving as one of the most widely viewed and assessed market indexes, the S&P 500—often hailed as ‘the stock market’—is recognised as a superior benchmark for assessing large-cap US equities. Tracking the performance of 503 of the largest companies listed on US stock exchanges, the market index, remarkably, covers nearly 80% of available market capitalisation (market cap), according to S&P Dow Jones Indices (a division of S&P Global).

Main Players in the S&P 500

The S&P 500 tracks a little more than 500 leading companies listed on US exchanges that are segregated by 11 S&P sectors, as classified by the Global Industry Classification Standard (GICS). 

Led largely by Information Technology companies (28.9%), Financials (13.0%) and Healthcare (12.6%), Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Nvidia (NVDA) and Alphabet Inc A (GOOGL) represent the top five index leaders, according to market cap (or, technically speaking, the float-adjusted market cap [this is the actual weighting method for the index]). However, the stock index composition should be considered a snapshot, with the arrangement of the index dynamically adjusting as companies’ market caps fluctuate. 

Trading the S&P 500

Equipped with the fundamentals, you can navigate and trade the S&P 500. Two primary methods of assessing whether the index is undervalued or overvalued are employed by traders and investors as well as market analysts: technical analysis and fundamental analysis. To be clear, many incorporate both methods to generate ideas. 

Technical analysis involves an assessment of historical price and volume data to gauge trend direction. Strategies falling under the umbrella of technical analysis are broad, usually through some form of price action analysis that incorporates technical indicators. Many who integrate fundamental analysis to assess the direction of the S&P 500 employ macroeconomic statistics. This includes assessing central banks (monetary policy) and economic aggregates, such as growth (Gross Domestic Product), inflation (the increase of the overall level of prices) and employment data. An overheating economy can lead a central bank to increase its overnight target rate, which in turn can weigh on major equity indices, for example (investors can move out of stocks and into bonds to take advantage of the higher yield). Another watch, of course, is the earnings of companies controlling the majority of the index weight, as share prices are largely determined on the back of earnings expectations. 

Where Can I Trade the S&P 500?

The S&P 500 is a stock market index, a market average, nothing more, nothing less. 

Consequently, trading this average directly, as you would shares of a company, is impossible. However, you can trade individual stocks within the S&P 500 and through derivatives products, index funds, mutual funds and ETFs (Exchange-Traded Funds). Irrespective of whether you trade CFDs (Contracts for Differences) or other derivatives products, all trades will be cash-settled for obvious reasons: you are trading a market average, not a physical underlying asset, such as gold or oil. 

Index funds are popular passive investment vehicles employed to invest in the S&P 500—in this case, an index fund's primary objective is to track the performance of the S&P 500, providing exposure to an entire market through one investment. Think about it like this: investing in an S&P 500 index fund will provide exposure to a small portion of each constituent within the index; this not only mimics the performance of the underlying index but does so with low fees while offering diversification, spreading risk across 11 sectors.  

Derivatives products such as futures and options contracts can also be used to trade the S&P 500. With FP Markets, you not only have access to this iconic market index through CFDs, but you can trade it using world-class trading platforms (think MetaTrader 4 [MT4] and cTrader) with competitively low commissions. In addition to a wide selection of global indices with FP Markets, more than 10,000 individual stocks are available to trade through CFDs, too!