Smart position sizing & risk management

Back to glossary
Market Structure

S&P 500

An index of the 500 largest publicly traded US companies, weighted by market cap. The most widely used benchmark for overall US stock market performance.

What is the S&P 500?

The S&P 500 (Standard & Poor's 500) is an index that tracks the stock performance of 500 of the largest companies listed on US stock exchanges. It is weighted by market capitalization, meaning bigger companies like Apple and Microsoft have more influence on the index than smaller ones. The S&P 500 is the single most referenced benchmark for the US stock market.

What it includes

  • 500 companies across all 11 market sectors (technology, healthcare, financials, energy, etc.)
  • Market cap weighted: the largest companies move the index the most. The top 10 holdings can represent 30% or more of the total index weight
  • Covers roughly 80% of total US stock market value
  • Committee selected: a committee at S&P Dow Jones Indices decides which companies are added or removed based on size, liquidity, and profitability

Why it matters to traders

  • The benchmark: when financial news says "the market" they mean the S&P 500. When your portfolio performance is measured, it is compared against the S&P 500
  • Market health: if the S&P 500 is in an uptrend, the broad market is healthy. If it is in a downtrend, most stocks are struggling regardless of their individual fundamentals
  • Index inclusion: when a company is added to the S&P 500, index funds must buy millions of shares, which often pushes the stock price up. Removal has the opposite effect
  • Futures: S&P 500 futures (ES) trade nearly 24 hours a day and set the tone for each trading session before the stock market opens

How to trade it

You cannot buy the S&P 500 directly because it is an index (a number), not a security. You trade it through ETFs or futures:

  • SPY: the most traded S&P 500 ETF. Best for day trading. See SPY
  • VOO: Vanguard's version with lower fees. Best for long-term investing
  • ES futures: S&P 500 futures contracts. Used by institutional and futures traders. Trade nearly around the clock
"Just buy the S&P 500" is the most common investment advice in history. Over the long term, the S&P 500 has returned roughly 10% per year on average. Most professional fund managers fail to beat it consistently.

Related Terms

Bear Market

A market condition where prices are falling or expected to fall, generally defined as a 20% or greater decline from recent highs.

Bull Market

A market condition where prices are rising or expected to rise, generally defined as a 20% or greater increase from recent lows.

Dow Jones Industrial Average

An index of 30 large blue-chip US companies. The oldest and most widely quoted market index, though many traders consider the S&P 500 more representative.

Index

A measurement of a section of the stock market. The S&P 500, Nasdaq Composite, and Dow Jones are the three most watched indexes.

QQQ

The Invesco QQQ ETF, tracking the 100 largest non-financial companies on the Nasdaq. Heavily weighted toward tech giants like Apple, Microsoft, Nvidia, and Amazon.

SPY

The SPDR S&P 500 ETF. The most traded security in the world, tracking the 500 largest US companies. When traders say "the market," they usually mean SPY.