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Understanding Stock Indexes

What is the S&P 500 Index?

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David John Marotta
President, Marotta Wealth Management, Inc., Marotta Wealth Management, Inc.
http://www.emarotta.com  
434-244-0000

David John Marotta is the President of Marotta Wealth Management, a fee-only financial planning and asset management firm in Charlottesville, Virginia. He is an oft-quoted writer and speaker on financial matters and his weekly financial column can be found at www.eMarotta.com

What is the S&P 500 Index?

 

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Host: What is the S&P 500 Index?

David Marotta: A lot of people think that the S&P 500 is the 500 largest companies in America and that's just not true. First of all it doesnt have to be 500 companies, when it started it only had about a 250 companies in it and they can also decide to leave out companies that are larger than other companies that they put in. Another misconception about the S&P 500 is that if you invest a $1000 into an S&P 500 fund, you are investing $2 into each of about 500 companies. That's not true either, the companies with the largest capitalization get the lion's share of your investment. If you invest a $1000 into S&P 500 about $200 goes into the top ten companies and about $500 goes into the top 45 companies. So the other 450 companies get about half of your investment. So the S&P 500 is not a very good index to invest in because its not very well diversified into smaller and mid cap companies. In fact all the S&P 500 is large cap and the top ten companies which are getting most of your investment are the super Mega cap companies and so, your investment is not even very well diversified among large cap companies.

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