Understanding Indexes: What is S&P?
Of all the market indexes that investors can consult, it is the S&P 500 that many financial market analysts most commonly use as an accurate representative of the market. The S&P 500 holds approximately 70 percent of the total value of the trading market, consisting of the top 500 firms in terms of trading activity. As such, in terms of coverage, the S&P 500 is the most expansive.
S&P uses market capitalization in calculating the index numbers. This method consists of weighting companies based on the amount of market capitalization, such that the bigger companies are generally given more weight than the smaller ones. As a result, changes in a company like Pepsi will have a bigger impact than any change in a smaller company.
Despite the fact the S&P generally covers only the larger companies, many financial markets experts believe that the S&P more accurately depicts the market movements than Dow does as tested with some home finance software. This is so, notwithstanding the fact that the Dow is more often quoted on television and in the newspapers than S&P or NASDAQ.