Standard and Poor’s 500 (S&P 500) – Definition

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Standard & Poor’s  S&P 500 Definition

Standard & Poor’s is a globally leading group that provides credible and independent credit ratings in about 26 countries of the world. S&P was founded in 1860, it is reputable for providing top-notch research and high-quality ratings. It is regarded as an index provider and a source of market intelligence in many countries where its offices are located.

Standard & Poor’s has many divisions otherwise called innovative platforms, they are S&P Dow Jones Indices, S&P Global Platts, S&P Global Ratings, as well as S&P Global Market Intelligence. S&P’s innovative platforms have achieved great feats in 26 countries through value creation.

As a market capitalization-weighted index, the Standard & Poor’s 500 index provide a gauge for U.S publicly traded companies, S&P 500 index was launched in March 1957, is is called S&P 500 index because it contains 500 of the largest stocks in US.

Since the time it was launched, S&P 500 index has been a standard for weighing the overall health of stock market in the United States.  S&P 500 contains stocks that trade on the New York Exchange and Nasdaq.

A Little More on What is the S&P 500

Basically, S&P provides independent credit ratings across different market sectors, it offers short-term and long-term credit ratings to different sectors. Its credit rating coverage is not limited to private company debt but also public or government debts.

Aside from S&P 500, there are also some great indexes by S&P Global which are also benchmark for determining health in different sectors of market. These indexes also have great influence in weighing the indexes of market capitalizations. These indices include the S&P MidCap 400, S&P SmallCap 600, the S&P 900 and the S&P Composite 1500 .

S&P was purchased by McGraw Hill Financial  in 1966 and 2016, this resulted in the rebranding of S&P to S&P global and its expansion into over 1,400 credit analysts and over 1.2 million credit ratings.

The origin of Standard & Poor can be traced back to 1923, with 233 companies as its stock market indicator or index. The company first started as Standard Statistics Co. but when it was merged with Poor’s publishing in 1941, it became Standard & Poor’s. In 1941, Paul Talbot Babson purchased Poor’s Publishing and merged it with Standard Statistics to become Standard & Poor’s. After this merging, its stock index grew to a number of 416 companies and the number kept increasing as the years go by. However in diverse publications, the origin of Standard & Poors is often linked to the year 1860.

The S&P 500 index is also regarded as Standard & Poor’s 500 Index. It is a trusted index provider that uses a market capitalization weighting method to give independent credit ratings of companies. S&P gives stock market of the 500 biggest publicly traded companies in the United States. The S&P 500 index is regarded as the benchmark for gauging large-cap U.S equities. S&P calculates market capitalization by multiplying the current stock price by outstanding shares, aside from S&P 500, there are other stock market that serve as benchmark of small-cap U.S equities, they are Dow 30 and the Russell 2000 Index.

Due to the fact that S&P 500 gives market-capitalization-weighted index of the 500 largest U.S companies, it has become significant for publicly traded corporations in the United States. Unlike other index providers that focus on small-cap index, S&P 500 has its attention on large-cap index in U.S. equities. S&P also provide float-weighted index, this is the index gotten when market capitalizations are calculated based on the amount of shares available for public trading.

Dow Jones industrial Average popularly referred to as Dow 30 is also an index provider but it focuses on small-cap industries unlike S&P 500 that has its attention on gauging large-cap U.S. equities.  Hence, the Dow Jones is associated with retail investor’s gauge of the U.S stock while S&P 500 provides institutional investor’s gauge of U.S equities.

While the Dow Jones Industrial Average provides a price-weighted index, S&P 500 gives a market capitalization-weighting index. Market capitalization gives higher allocation to companies with the largest market capitalizations while price-weighted index gives companies with higher stock prices a higher index weighting.

Russell index just like the Standard & Poor’s company has many divisions, but the company setting is quite different from the S&P’s. The Russell index company also provides financial market intelligence in form of credit rating system to publicly traded corporations in the United States.

Russell indexes differ from the Standard & Poor’s Company in that the modes it employed in selecting stocks or constituent companies is different from what S&P uses. S&P is made up of the 500 largest publicly traded corporations in the U.S. and these corporations are selected based on the decision of a committee. In Russell indexes however, stocks or companies are chosen using a formula.

The Standard & Poor 500 popularly known as S&P 500 is not the only index of the S&P global company, there are many other indices. The S&P Global company is made up of 1,200 indices, the most popular ones are S&P MidCap 400 and S&P SmallCap 600. Both of them focus on or represent the U.S. market’s small-cap sector, they provide credit ratings for small-cap stock market. Other  popular members of the S&P Global company include the S&P 500 which focuses on the large-cap sector, and S&P 1500 which is a combination of all-capitalization index.talization index.

References for the S&P 500

Academic Research on the Standard & Poor’s (S&P)

Mean reversion of Standard & Poor’s 500 index basis changes: Arbitrage‐induced or statistical illusion?, Miller, M. H., Muthuswamy, J., & Whaley, R. E. (1994). The Journal of Finance, 49(2), 479-513. This paper examines the basic changes noticeable in the Standard & Poor’s 500 index, it studies whether the changes are just statistical illusion or induced by arbitrage. This paper analyses   index arbitrage and mean reversion in stock index. It however finds out that even without formal arbitrage, basis changes occur to the S&P 500 index. These changes are negatively autocorrelated as lagging stocks trade and update happens. Hence, these changes are seen in this paper as a statistical illusion. Furthermore, basic changes to to index often arise because stocks in the index portfolio engage in infrequent trading.

Testing the differences between the determinants of moody’s and standard & poor’s ratings an application of smooth simulated maximum likelihood estimation, Moon, C. G., & Stotsky, J. G. (1993). Journal of applied econometrics, 8(1), 51-69. This paper seeks to highlight the differences between the credit rating models adopted by Moody’s and Standard & Poor’s rating agencies. Previous studies have been conducted on bond ratings but this paper extends its study to test the determinants of the municipality’s rating for both Moody’s and Standard & Poor’s ratings. Through an empirical framework, this paper formally examines how the determinants of ratings differ between these two agencies. It further applies the smooth simulated maximum likelihood estimation to test their differences. The study reveals that Moody’s uses self-selection in ratings while S&P does not. Other findings of this study are presented in this paper.

Standard & Poor’s 500 index futures volatility and price changes around the New York Stock Exchange close, Chang, E. C., Jain, P. C., & Locke, P. R. (1995). Journal of Business, 61-84. The Stock Exchange market is faced with volatility or vulnerability as a result of drastic changes in stock price or stock return. Volatility and changes in the Standard and Poor’s have been studied to affect the credit ratings provided by the company. This paper examines how the closing of NYSE (New York Stock Exchange) influences or impacts the volatility and price changes in the Standard & Poor’s (S&P) futures market. The close of NYSE is often associated with a decline in volatility of the futures market, this paper examines the effects of this significant decline on the S&P futures price.

Market effects of changes in the Standard & Poor’s 500 index, Lamoureux, C. G., & Wansley, J. W. (1987). Financial Review, 22(1), 53-69. S&P 500 represents the 500 largest stocks that trade on the New York Stock Exchange, this index provides independent credit ratings for firms. The S&P 500 index can experience some changes due to some factors. This paper studies how changes in the Standard & Poor index affect stock returns.  In S&P index, stocks are not meant to be added or removed from the index, rather, they are to maintain index representation. This paper conducts tests on how changes in S&P 500 index affect market index. Results from the tests are discussed in this paper.

Pricing efficiency of the S&P 500 index market: Evidence from the Standard & Poor’s Depositary Receipts, Chu, Q. C., & Hsieh, W. L. G. (2002). Journal of Futures Markets: Futures, Options, and Other Derivative Products, 22(9), 877-900. This paper draws evidence from the Standard & Poor’s Depositary Receipts (SPDRs) to examine the Pricing efficiency of the S&P 500 index market. SPDRs refers to exchange-traded funds or securities that symbolize the S&P 500, this allows global advisors and investors to track the activities of S&P 500.  This paper tests whether the use of SPDRs will in any way influence the pricing efficiency of the S&P 500 and its future. The results of diverse efficiency tests as well as a trade‐by‐trade investigation of the the effects of SPDRs on the S&P 500 and the futures are extensively discussed in this paper.

Standard & Poor’s official response to the Basel Committee’s proposal, Griep, C., & De Stefano, M. (2001). Journal of Banking & Finance, 25(1), 149-169. Standards & Poor’s is a global company that offers a range of financial market intelligence such as credit ratings in the U.S stock market. Due to the integrity and steadfastness of S&P, its popularity has horn over the ages. S&P acknowledge the receipt of a proposal by the Basel Committee and gives an official response to the proposal. This journal contains the official response of  Standard & Poor’s to the Basel Committee’s proposal which was presented in 1999. The risk adjustment capital introduced in the 1988 Basel record, and the provisions of the current proposal towards the advanced development of world banks are discussed.

 

Do Investors Look Beyond Insured Triple–A Rating? An Analysis of Standard & Poor’s Underlying Ratings, Peng, J. (2002). Public Budgeting & Finance, 22(3), 115-131. An insured Triple A is a credit rating system used for insurance companies. While Moody’s triple A (Aaa) means companies with highest quality, the Standard & Poor’s is triple A (AAA) is for the extremely strong ones. Using the underlying ratings of Standard and Poor’s, this paper seeks to find out whether investors look beyond the insured triple A when choosing insurance bonds or otherwise. As a result of prominence of municipal bond insurance, investors have begun to rely on underlying ratings of insured bonds in deciding whether a bond is risky or not. This paper examines the effects of underlying ratings in alleviating the information asymmetry problems found in the municipal bond market.

Price and Volume Effects Associated with the Creation of Standard & Poor’s Midcap Index, Collins, M. C., Wansley, J. W., & Robinson, B. (1995). Journal of Financial Research, 18(3), 329-350. When the Standard & Poor’s MidCap 400 index was created in 1991, certain price and volume effects are associated with its creation and this paper seeks to explore this. Prior studies such as the study on 1975 index found out that there are significant market and price responses (either positively or negatively) to the announcement day excess return. Diverse factors are responsible for these responses which have been explored in earlier studies. Hence, this paper explores the significant price and volume effects during the two weeks leading up to the Standard & Poor’s announcement but no effects were noticed during this period. The performance of MidCap stocks, price run-up, stock information leakage and other indices are explored in this paper.

MD&A trends in Standard & Poor’s top 100 companies, Cole, C. (1990). Journal of Corporate Accounting & Finance, 2(2), 127-136. This journal is a study on the MD&A trends noticeable in Standard & Poor’s top 100 companies. MD&A refers to a section of a company’s annual report that is featured in the management’s’ discussion. This article surveys the annual report format, its length, segments, cross references, year‐by‐year comparisons as well as the price/volume analysis of the top 100 Standard & Poor’s companies. The results of the survey are discussed in the paper. The survey also extended to the study of unusual items such as cash flows, inflation, environmental matters, forward‐looking information, liquidity and financial condition disclosures in the management’s discussion.

Private Capital and Public Policy: Standard & Poor’s Sovereign Credit Ratings, Abdelal, R. E., & Bruner, C. (2005). This paper gives a description of the Standard & poor’s credit rating business. It discusses its history peculiar traits of its credit ratings, their standard among other qualities. Also, in order to do justice to the study of Standard & poor’s credit rating business, this paper touches on the evolvement and expansion of sovereign rating business over the decades, the history of credit ratings and their goals. The private capital and public policy of the S&P sovereign credit ratings are also explored. This paper discusses issues and debates surrounding credit ratings among others.

Split ratings and differences in corporate credit rating policy between Moody’s and Standard & Poor’s, Bowe, M., & Larik, W. (2014). Financial Review, 49(4), 713-734. Split rating simply refers to a situation in which two ratings agencies give a bond two different ratings. In this paper, the split credit ratings practised in corporate credit rating policy by two top-notch rating agencies are investigated.  Moody’s and Standard & Poor’s are two big credit agencies but pitched in different adjacents, this paper examines how each of them award split credit ratings. The credit rating industry is an important policy concern in the United States. The differences in Moody’s and S&P credit ratings tend to reflect their indicators and dimensions of practise. For instance, Moody’s assign lower ratings to smaller and less profitable companies with low interest coverage. The results of the differences between credit ratings by these agencies are explored.

Changes in the Standard and Poor’s 500 List, Dhillon, U., & Johnson, H. (1991). Journal of Business, 75-85. This paper presents an investigation on the changed in the Standard and Poor’s 500 List conducted by Harris and Gurel (1986) and Shleifer (1986). This paper also present evidence for a strong positive stick price reaction to the announcement listing in the S&P stock index. Although, different factors are responsible for stock price reaction to the announcement of listing, this study reveals that the price increase is not as a result of the release of new information, rather, it is due to the increase in demand.  This paper also highlights the differences in the findings of H&G and Shleifer despite they investigated the same phenomenon.

S&P 500 index additions and earnings expectations, Denis, D. K., McConnell, J. J., Ovtchinnikov, A. V., & Yu, Y. (2003). The Journal of Finance, 58(5), 1821-1840. This paper studies the stock price increase and earning expectations that are associated with addition on the S&P 500 index. It discusses the experiences of companies that are newly added to the S&P 500 index in terms of stock price increase and improvement in expected earnings. This study seeks to find out whether the S&P 500 index inclusion is an information-free event or otherwise. It also analyses the analysts’ earnings per share resulting from the S&P index inclusion.

The October 1987 S&P 500 stock‐futures basis, Harris, L. (1989). The Journal of Finance, 44(1), 77-99. Using a 10-day period after the October 1987 stock market crash, this paper examines the changes in the S&P 500 index and their future contracts. This paper also gives an estimate of the transaction history of the 500 stocks that the S&P 500 index represents. Unsynchronised trading patterns tend to lead to changes in stock index as it explains the large absolute futures-cash basis during the stock market crash. This paper finds out that despite the adjustment made to unsynchronised patterns of trading, there is still an autocorrelation in the stock index and futures.

New evidence on stock price effects associated with changes in the S&P 500 index, Lynch, A. W., & Mendenhall, R. R. (1997). The Journal of Business, 70(3), 351-383. After the stock market crash on October 1987, there have been certain changes in the Standard & Poor’s 500 index since 1989 after changes in composition were announced. This paper presents evidence showing the stock price effects associated with the October 1989 changes in S&P index. The reaction of the stock market to the anticipated announcements of changes in stock composition and demand for a stock are examined. With evidence drawn from from the 1989 stock market, this paper records a significantly positive (negative) post-announcement abnormal stock returns. This however indicates an existing price pressure and downward-sloping long-run demand curves for stocks which violates the efficiency of market.

Hedging performance and basis risk in stock index futures, Figlewski, S. (1984). The Journal of Finance, 39(3), 657-669. The success of stock index futures in the early 1982 witnessed the introduction of new futures and index options in the stock index market. This paper examines the hedging performance and basis risk in stock index future, it considers the involvement of a cross-edge in the stock index futures. The roles of stock position and underlying portfolio for the index contract is examined. This paper reveals that is a stock position is hedged, it can expose the stock to certain measure of bass risk which will result in change in the future price and the inability to track the value of a cash position The sources of basis risk in stock index futures are also discussed.

Tracking S&P 500 index funds, Frino, A., & Gallagher, D. (2001). Journal of portfolio Management, 28(1). There has been little or no previous studies on the tracking of S&P 500 index funds, this paper however presents a investigation on how S&P 500 index funds are tracked. Since the 1990s, there has been a significant growth in index funds, the management of these funds is also important.  This paper highlights the difficulties of index funds and also examines the problems that index managers are faced with when trying to replicate the returns of target benchmarks. It also investigates tracking error in index fund performance and and the variation of tracking error over time for S&P 500 index mutual funds. It analyses how this is caused my market frictions among other factors.

The price response to S&P 500 index additions and deletions: Evidence of asymmetry and a new explanation, Chen, H., Noronha, G., & Singal, V. (2004). The Journal of Finance, 59(4), 1901-1930. Additions and deletions that are made to the S&P 500 index tend to invoke certain price responses or reactions. Using an evidence from asymmetry price response, this paper discusses price effects of changed in the S&P 500 index. The results of the studies carried out on changes in S&P 500 index are not in agreement with the symmetric price response to additions and deletions in the S&P 500 index. For instance, the result of this study reveal that added firms experience a permanent increase in price while there is not permanent decrease for deleted firms. This paper further presents the findings of empirical tests carried out on the effects of changes in S&P 500 index.

An analysis of the S&P 500 index and Cowles’s extensions: Price indexes and stock returns, 1870–1999, Wilson, J. W., & Jones, C. P. (2002).The Journal of Business, 75(3), 505-533. S&P index provides market financial intelligence in form of credit ratings to firms. Being a benchmark for stock market performance, the S&P index remains the index of choice for many investors.  S&P index provides a gauge for stock market performance. Using a study of the price indexes and stock returns between 1870 and 1999, this article analyses the S&P 500 index and Cowles’s extensions. In 1971, Cowles extended the S&P index series as far back as 130 years, he estimates the dividend and earnings of index from 1971. Cowles’s monthly index is improved in order to provide month‐end estimates from February 1885. This paper is an analysis of price indexes and stock returns of S&P 500 index and Cowles’s extensions between 1870 and 1999.

The relationship between spot and futures prices in stock index futures markets: Some preliminary evidence, Modest, D. M., & Sundaresan, M. (1983). Journal of Futures Markets, 3(1), 15-41. This paper exemplifies some preliminary evidence regarding the relationship between spot and futures prices in stock index future markets. Despite that trading in financial futures accounts for about 35% of all future contracts, there is still tendency that it becomes a larger share of the market. Investing in stock market requires a deep understating of the marketplace, features of each market, stock prices, stock indexes among others.  Investing in these markets also require an understanding of relationship between the future prices and spot prices in the stock market.

Style momentum within the S&P500 index, Chen, H. L., & De Bondt, W. (2004). Journal of Empirical Finance, 11(4), 483-507. There are many ways through which investors benefit from the equity style management exhibited by firms, style momentum in equity returns is an empirical phenomenon that is distinct from price and industry momentum. This paper examines the style momentum of firms within the Standard & Poor’s (S&P) 500 index. In a bid to analyse the style momentum of firms within the S&P 500 index, this paper studies all firms in the S&P 500 index since 1976. The market value of equity, book-to-market ratio and dividend yield-capture style are the three major characteristics of a company that trend in equity returns, this paper examines how these characteristics benefit investors.

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