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Answer:
Dear BuyandHolder,
Your
question is very timely. On Wednesday, May 30, the
S&P 500 hit a historic new high of 1530.23. The previous
high, back in March 2000, was 1527.46.
What
It Is
The
Standard & Poor's 500 Index measures changes in the
stock market based on the average performance of 500
widely held common stocks. The first Index, dating
back to the 1920s, had only 90 issues.
Until
1988, the Index was made up of 400 industrial, 40
financial, 40 public utility and 20 transportation
stocks. Today, however, there is more flexibility
in these various categories -- in order to more accurately
reflect our diverse economy. It remains however, purposefully
broad based so it can measure the price changes in
a large number of commonly owned stocks. In that respect,
it is quite reflective of the market in general and
is often referred to as the benchmark for medium-
to large-stock investors.
The
Index is prepared by Standard & Poor's, a New York-based
financial advisory and publishing company that supplies
financial and statistical data, analyzes stocks, rates
bonds and prepares investing materials.
Value
Weighted
Each
stock in the Index is market-value weighted. That
means an individual stock's closing price on a given
day is multiplied by its outstanding shares. This
weighting process provides a realistic measure of
value because each stock then influences the movement
of the Index in proportion to its importance. In other
words, some stocks regularly have a greater influence
on the market than others because of their high market
value.
Who
Selects the Stocks
The
stocks in the Index are selected by a special S&P
committee. It's known on Wall Street simply as The
Committee. Among the various criteria for stock selection
are: a company's position within its industry, its
market value size and its trading volume.
New
companies are added over time. For example, when a
company merges with another or declares bankruptcy,
a replacement is found. Changes are also made by S&P
to update the overall composition of publicly traded
stocks. For example, initially there were no high-tech
or Internet stocks in the S&P 500. That obviously
had to be changed.
Using
the Index
Three
considerations for individual investors:
-
Often a stock will jump in price when it's announced
that it has been added to the Index.
- The
Index can be used as a broad measure of the rise
and fall of the overall market.
- The
Index can be used as a yardstick against which to
measure the performance of your own portfolio.
Good
luck!
BUYandHOLD
does not offer or provide any investment advice or
opinion regarding the nature, potential, value, suitability
or profitability of any particular security, portfolio
of securities, transaction or investment strategy.
Any investment decisions you make will be based solely
on your evaluation of your financial circumstances,
investment objectives, risk tolerance, and liquidity
needs. The securities mentioned above are being used
for illustrative purposes only and should not be regarded
as an offer to sell or as a solicitation of an offer
to buy and past performance is no guarantee of future
results.
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