The U.S. stock market undoubtedly represents the world’s leading financial market. The vast majority of investors turn to its indices to understand market prices and to analyze possible investment opportunities. One of the most representative indices is certainly the S&P 500. Let’s find out in detail what this index is, how it is composed and what are the best solutions for investing.
What is the S&P 500 Index
The S&P 500 (Standard and Poor’s 500) is a well-known stock market index made up of the 500 American companies with the highest level of market capitalization. Created at the end of the 1950s by the rating company of the same name, today it has reached the status of the main indicator of the US stock market, surpassing in importance the historic Dow Jones index.
The reason for this rise is mainly due to its completeness: the S&P 500, in fact, includes both the 30 stocks listed on the NYSE and the 100 tech stocks listed on the NASDAQ, which allows it to provide a complete picture of the US financial markets. Furthermore, since this index considers the stocks of the companies with the highest market capitalization listed in the United States, it necessarily includes the most influential players on the financial scene. To date, the index represents over 80% of the total U.S. market capitalization.
The Components: Which Companies It Includes
Before considering investing in a basket of stocks, it is appropriate to get to know what they are. As we have already explained, the S&P 500 includes 500 companies with high market capitalization. It will not be possible to mention all of them, but it is important to highlight the most influential companies.
Among the top stocks in the S&P 500 we have:
- Amazon (NASDAQ: AMZN)
- Microsoft (NASDAQ: MSFT)
- Apple (NASDAQ: AAPL)
- Alphabet (NASDAQ: GOOG)
- Facebook (NASDAQ: FB)
- Berkshire Hathaway (NYSE: BRKb)
- Visa (NYSE: V)
- Johnson & Johnson (NYSE: JNJ)
- JP Morgan Chase (NYSE: JPM)
Chart and Price of the S&P 500
An important aspect to consider before undertaking an investment, even more so in a stock index, concerns the analysis of charts and price trends. Doing chart analysis means observing the price trend in a given time period. This is an essential part of technical analysis, used to understand the price movement in the market over a past period, so that you can be able to make a decision based on predicting the direction of prices in the near future.
In terms of pricing over the past year, the S&P 500 Index has performed 13.17% over the past 12 months, touching the 4,800 point threshold (4,796.56 to be precise, its all-time high) at the beginning of January 2022. Immediately thereafter, the trend was interrupted by a sharp correction that led to a remarkable 10% decline over the next three weeks. It remains to be seen whether this is the beginning of a Bear Market phase or whether, as mentioned, the stock market is just catching its breath after months (and years) of impressive rises.
S&P 500 ETFs: The Best Solutions on the Market
One of the best ways to invest in the S&P 500 index is through ETFs, an acronym used to identify Exchange Traded Funds. ETFs are nothing more than passively managed funds that aim to replicate a benchmark index in order to emulate its performance. Let’s discover in detail two of the main ETFs on S&P 500.
One of the best is the iShares S&P 500 UCITS ETF, a harmonized ETF largely aligned with European standards and assimilated to any financial instrument listed on the stock exchange. The issuer is iShares, taken over in 2008 by the New York giant BlackRock.
Another giant of managed savings is Vanguard, which offers among its ETFs on the S&P 500 the Vanguard S&P 500 ETF (VOO). This is a solution that features a high degree of liquidity and an equally high volume of transactions. It was launched 10 years ago and is the ideal solution for investors who prefer a short-term time horizon, low risk tolerance and the presence of dividends.
How to Invest in the S&P 500 Index
Investing on such a comprehensive and diversified index is usually one of the most common actions among investors. Choosing to allocate one’s money on the aggregate performance of the U.S. market is considered a low risk solution if one considers a medium or long term time horizon.
The S&P 500 has in fact historically achieved remarkable performances in long periods, supported by some financial giants that do not seem to stop their race. This of course does not mean that profits are certain, but paradoxically the stock market, especially if reflected by such a comprehensive index, is less risky for long term investment objectives.
In addition to the ETFs we have already described, it is also possible to invest in the S&P 500 via CFDs (Contracts For Difference). There are numerous online broker platforms that allow you to invest independently and from home with CFDs. Thanks to these tools you can trade upwards, if you expect the underlying to grow, or downwards, if you have negative expectations. Among the best online brokers we mention eToro and XTB, which represent two of the most valid and innovative solutions to invest in the S&P 500 index.
Forecasting the Future: Is it worth it?
It is not easy to predict the future performance of the S&P 500. In fact, there are many variables that can affect its quotation: the socio-political context, the specific situation of some companies included in the index, the general macro-economic framework, the FED’s choices on interest rates and many others.
These are all factors that can have a significant impact in the short term. If, on the other hand, the time horizon set for the investment is longer, there are no real obstacles that lead one to doubt the convenience of investing in the S&P 500 index. At least until China succeeds in taking away the scepter of first world power from the USA, there is no reason to doubt the progress and growth of the American economy.