A stock market index tracking the 500 largest publicly traded companies in the United States, widely used as a benchmark for the overall U.S. stock market.

S&P 500 — Fiscal Word Money Glossary

What S&P 500 Means in Plain English

The S&P 500 is a list — specifically, a list of 500 large, established U.S. companies selected by a committee at S&P Global. The list includes companies like Apple, Microsoft, Amazon, Berkshire Hathaway, and Johnson & Johnson. When you hear “the market went up 2% today,” they almost always mean the S&P 500 went up 2%.

“S&P” stands for Standard & Poor’s, the financial data company that maintains the index. The 500 companies on the list aren’t chosen arbitrarily — they must meet specific criteria including a minimum market capitalization (currently over $14 billion), sufficient trading liquidity, U.S. domicile, and profitability. The committee reviews the list regularly, adding and removing companies as they meet or fail to meet criteria.

You can’t invest in the index directly — it’s a concept, a measuring stick. What you can invest in are funds designed to replicate the index: ETFs and mutual funds that own the same 500 companies in the same proportions as the index. When the index rises 10%, funds tracking it rise approximately 10% (minus tiny fees).

How the S&P 500 Works

The S&P 500 is market-cap weighted, meaning larger companies have a bigger influence on the index’s performance. Apple and Microsoft, each with market caps above $3 trillion, make up roughly 6-7% of the index each. A small company at the bottom of the list might represent only 0.01%. This means tech and other large-sector companies have outsized influence on the index’s daily moves.

How companies enter or exit: S&P’s index committee meets regularly and makes additions and removals based on the stated criteria. When a company gets added to the S&P 500, all the index funds tracking it must buy that company’s shares — a forced demand that often temporarily lifts the stock price. The opposite happens when a company is removed.

Historical returns: the S&P 500 has averaged roughly 10% per year in nominal terms going back to 1957. Adjusted for inflation (about 3% annually), the real return is closer to 7%. These averages include brutal years — 2008: -37%; 2022: -18% — and spectacular ones — 2019: +31%; 2023: +26%. The average masks extreme variation.

Why the S&P 500 Matters to You

For most individual investors, the S&P 500 is the most practical exposure to U.S. equities. A single ETF like VOO or FXAIX puts you in 500 of the largest, most durable American companies. The case is strong: broad diversification, low cost (0.03%), and market-rate returns.

One thing worth knowing: the S&P 500 is not the whole market. It excludes mid-cap and small-cap U.S. companies, which can sometimes outperform large caps over certain periods. It also excludes international stocks entirely. A total U.S. market fund (like VTI) captures those smaller companies too. For most people, the difference over long horizons is modest — both are sound core investments.

Using the S&P 500 as a benchmark: if your active mutual fund manager claims impressive returns, the first question is always: how did those returns compare to the S&P 500 over the same period? “I returned 8% last year” sounds good until you hear the S&P 500 returned 26%.

Quick Example

You invest $500/month in a VOO ETF (S&P 500) starting at age 25. The S&P 500 averages 10% annually. After 40 years, at age 65, your total contributions are $240,000. Your account balance: approximately $3,160,000.

The same $500/month in a savings account at 2%: roughly $368,000. The difference — $2.79 million — is what the S&P 500’s historical return provides versus cash. There’s no guarantee the next 40 years match the last 40, but the structural reasons for long-term equity outperformance remain intact.

Common Misconceptions

“The S&P 500 is the entire stock market.” It covers around 80% of U.S. market capitalization, which means roughly 20% of U.S. stocks are not represented. International stocks — about 40% of global market cap — are completely excluded. A global total-market fund offers broader exposure.
“A higher S&P 500 level means stocks are ‘expensive’ and you should wait to invest.” Market timing based on index level is a well-documented way to underperform. The S&P 500 at 5,000 isn’t inherently expensive or cheap — what matters is the earnings and growth prospects of the underlying companies relative to prices. Investors who waited for the S&P to “pull back” from 3,000 in 2020 missed the run to 5,000+.