What is the S&P 500? How the index works

The S&P 500 is a stock market index that tracks about 500 of the largest companies listed in the United States, weighted by the market value of their shares. Run by S&P Dow Jones Indices, it covers roughly four-fifths of the value of all US-listed stocks, which is why fund managers, economists and the news treat it as the standard measure of how American shares are doing.

In short

• The index holds about 500 large US companies chosen by a committee against published rules on size, trading and profits.
• Bigger companies count for more: each one's weight is its market value, counting only the shares that trade freely.
• Index funds copy it, so buying one buys a small slice of every company in it. It has also lost about half its value or more from a peak, in 2000–2002 and again in 2007–2009.

Where did the S&P 500 come from?

Its ancestor was an index of 233 companies that the Standard Statistics Company began computing weekly in 1923, followed in 1926 by a 90-stock index calculated every day. Standard merged with Poor's Publishing in 1941 to form Standard & Poor's, and on 4 March 1957 the index was widened to 500 companies. Computers made it practical to recalculate a 500-stock index throughout the trading day.

The number in the name is a target, not an exact count. Some companies have more than one class of shares in the index, so it usually holds a few more than 500 listings. Its members change several times a year as companies grow, shrink, merge or are taken over.

How are companies chosen?

A committee at S&P Dow Jones Indices picks the members, using published rules plus its own judgment. To be added, a company generally must:

• be based in the United States and listed on a major US exchange;
• be large enough: the minimum company value was set at $22.7 billion in July 2025, and the threshold is reviewed every quarter;
• have enough of its shares available to trade, and trade them often enough;
• be profitable: its reported earnings over the latest four quarters added together, and in the latest quarter alone, must be positive.

The committee also tries to keep the index's mix of industries close to the market's. Because of the profit rule and the committee's discretion, a company can be large and still left out, which is why the S&P 500 isn't simply the 500 biggest companies. Meeting the rules doesn't guarantee entry, and falling slightly below them doesn't mean automatic removal.

How does market-value weighting work?

Each company counts in proportion to its float-adjusted market value: the share price times the number of shares that trade freely. Shares locked up by founders, governments or other companies are left out, a rule the index has used since 2005. The index level is the total of those values divided by a number called the divisor, which is adjusted so that adding a company or a share buyback doesn't by itself move the index. The level was set to 10 for the years 1941 to 1943.

Here is what weighting by value means, with three imaginary companies:

	Float-adjusted market value	Weight in the index	Effect of a 10% rise in its shares
Company A	$3,000 billion	90.1%	Index rises about 9.0%
Company B	$300 billion	9.0%	Index rises about 0.9%
Company C	$30 billion	0.9%	Index rises about 0.09%

The weights are each value divided by the $3,330 billion total. The same 10% move matters a hundred times more for the biggest company than for the smallest. That is the opposite of the Dow Jones Industrial Average, which weights by share price and ignores company size.

The real index leans heavily on its largest members. On 31 August 2026, its 10 biggest companies made up 38.9% of its total value, a level of concentration that depends on how a few large technology companies are doing at any moment. Weighting by value means the index automatically gives more room to companies the market values most, which supporters see as its main virtue and critics as a risk when those few companies fall together.

Why is it the usual benchmark?

The S&P 500 is broad enough to stand for large US companies as a group, covering about 83% of the value of US public companies at the end of 2025, yet small enough to be traded and copied cheaply. Fund managers who pick stocks are usually judged by whether they beat it, after their fees. Futures and options on the index, traded since 1982 and 1983, let investors bet on or protect against the whole market's moves in a single contract.

It is not the whole market. It leaves out smaller companies, which have their own indexes such as the S&P MidCap 400 and SmallCap 600, and it is purely American, though many of its companies earn much of their money abroad.

What are index funds, and how do they copy it?

An index fund is a fund that buys the stocks in an index in the same proportions, instead of trying to pick winners. On 31 August 1976, Vanguard, led by John Bogle, launched the First Index Investment Trust, now the Vanguard 500 Index Fund, the first index mutual fund for ordinary investors. Critics at the time called it "un-American". On 22 January 1993, State Street launched the SPDR S&P 500 ETF Trust, the first exchange-traded fund listed in the United States, a fund that trades on the exchange like a share. By the end of 2024, about $13 trillion was invested in products that track the index.

The appeal is low cost and wide spread. Because an index fund simply holds what the index holds, it trades rarely and charges little, and a single purchase spreads money across hundreds of companies. It also guarantees that a holder gets the market's return, minus small fees, good or bad.

How far has the S&P 500 fallen in bad years?

Long-run growth has come with deep falls. Using the calendar-year price returns, here is what the dot-com bust did:

Year	Price change	$100 at the start of 2000 becomes
2000	−10.1%	$89.86
2001	−13.0%	$78.14
2002	−23.4%	$59.88

Three bad years in a row took away about 40% of the index's value, as the dot-com bubble deflated. In 2008, during the financial crisis, the index fell 38.5% in a single year. Measured from peak to trough rather than by calendar year, both falls were deeper, about half or more. In 2022 it fell 19.4%. The arithmetic of losses is unforgiving: after a 40% fall, the index has to rise about 67% just to get back to where it started, because the rise is measured from a lower base.

Not advice

This note explains how the index works. It isn't financial advice, and the index's past returns, good or bad, don't predict its future ones.

For the machinery underneath, how the stock market works explains shares and prices, and capitalism covers the system of ownership the index measures. For how markets fit into the wider economy, see what economics is.

Check yourself

• Without looking back: why does a 10% rise in the largest company move the S&P 500 far more than the same rise in the smallest?
• Why isn't the S&P 500 simply the 500 largest US companies?
• After a 50% fall, how much does an index have to rise to get back to where it started, and why?

Sources

• S&P Dow Jones Indices Announces Update to S&P Composite 1500 Market Cap Guidelines — S&P Dow Jones Indices, 1 July 2025
• S&P 500 — Wikipedia
• Our history — Vanguard
• SPDR S&P 500 ETF Trust — State Street Global Advisors