STANDARD AND POOR’S 500 (S&P 500)
An index consisting of 500 stocks chosen for market size, liquidity and industry group representation, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities, and it is meant to reflect the risk/return characteristics of the large-cap universe.
Companies included in the index are selected by the S&P Index Committee, which is a team of analysts and economists at Standard and Poor’s. The S&P 500 is a market-value weighed index, which means each stock’s weight in the index is proportionate to its market value.
The S&P 500 along with the Dow is the most commonly used benchmarks for the overall U.S. stock market. It is tough for individual investors to buy the index – you would have to buy 500 different stocks. However, it is extremely easy to purchase financial products based on the index such as index funds, ETFs, and SPDRs
INDEX FUNDS
A portfolio of investments that are weighted the same as a stock-exchange index in order to mirror its performance. Investing in an index fund is known as passive investing. The primary advantage to such a strategy is to lower management expense ratios on index funds. Also, a majority of mutual funds fail to beat broad indexes such as the S&P 500.
EXCHANGE-TRADED FUND (ETF)
A security that tracks an index and represents a basket of stocks like an index fund, but trades like a stock on an exchange, thus experiencing price changes throughout the day as it is bought and sold. By owning an ETF, you get the diversification of an index fund as well as the ability to sell short, buy on margin and purchase as little as one share. The most widely known ETFs are SPDR (Spider).
SPDR (Spider)
Shares in trust that owns stocks in the same proportion as represented by the S&P 500 stock index. They contain one-tenth of the S&P 500 index portfolio. A Spider (ticker SPY) sells for a dollar amount equal to about one-tenth of the S&P 500 index level. By trading like a stock, Spiders have continuous liquidity while the market is open; they can be short sold, and they provide regular dividend payments.
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