calculated.

And if you think you already know everything

there is to know about the S&P 500,

you hear about it all the time, stick with me.

I think you'll learn something new.

00:00:22,560 --> 00:00:26,400 Now, one of the reasons we care so much about the S&P 500

is because it's actually considered a relatively stable

way to invest your money.

This is the returns of the index over the last five years.

So we start in October of this year, mid-October,

and go back five years to mid-October of 2014.

And as you can see, if you put your money in five years ago

you'd actually get a pretty stable return

despite a little bit of turbulence in the latest year.

Now, the S&P 500 is reflective of the large cap US stocks

space because the committee that selects the companies keeps

in mind how much of a sector breakdown

each industry should get so that it reflects the larger cap

stocks space.

So, as an example, if technology companies represent about 20

per cent of total large cap companies in the US,

they're going to make sure that the companies in the S&P 500

also reflect about a 20 per cent technology representation.

And they actually even break it down

into subcategories from there, but we're not

going to get into all that.

What we are going to get into is how this thing is actually

calculated.

Now, as you may know there are 500 companies in the S&P 500,

but don't get confused.

There are actually 505 listings on the S&P 500.

And that's because the listings refer

to some companies that have what's called a dual class

share system.

And dual class just means say you're Facebook.

You have class A shares, and you have class B shares.

The class A shares give more voting

rights to those who hold them.

And actually, the S&P 500 decided recently

we're not going to let any more companies in that have

this dual class share system.

But that is why despite there being 500 companies,

there are about 505 listings on the S&P 500.

So when we say large cap, we're talking about large

capitalisation.

And that means we do actually need to figure out what

the market capitalisation is of each company in the S&P 500.

And that's where we start.

00:02:30,150 --> 00:02:32,630 OK, so let's say we're starting with Microsoft,

which just happens to be the largest company in the S&P 500.

You first start with the price of their shares.

And then to get the market cap what you usually do

is you multiply by the quantity of shares out there.

Price times quantity equals market cap.

00:02:50,450 --> 00:02:54,390 But for the S&P 500 we have to do one additional thing.

See, the market cap of the companies in the S&P 500

are actually called float-adjusted market caps,

which means we need to take the quantity of shares out there.

And we need to actually figure out

what percentage of those shares are actually

tradeable on the markets, i.e.

not held closely by executives, or by other private owners.

00:03:15,220 --> 00:03:18,260 So we multiply by the float - again,

the percentage of those shares that are out there

ready to trade.

And this gives us the float-adjusted market cap

of a company.

That's just one company, though.

Remember, there's 500 companies in this index,

so you're going to repeat this 500 times.

I'm not going to make 500 lines here.

You get the idea.

But once you have all of those, you're going to sum them up.

And what you're going to get is the total market cap

of all the companies in the S&P 500, which

right now is about $24tn.

00:03:53,380 --> 00:03:55,040 But we're not done quite yet.

There's still one more step because the S&P 500

isn't $24tn.

Right here, you can see it's $3,000.

So what we do is we put a divisor under this number.

00:04:08,230 --> 00:04:10,750 And S&P doesn't necessarily always share

what exactly the divisor is, but just

know it's a number that breaks the sum down to something

a little bit more manageable.

And also, don't forget.

The S&P 500 is changing all the time.

The companies in here, they issue

more shares, or their share price changes,

or they do a stock split, or their price falls

so low that they're not actually considered a large cap

company any more, and they need to drop of the index, which

means a new company needs to come on to take their place.

These changes are happening all the time.

And so this divisor is really key in making sure

that the index doesn't change dramatically

just because, for example, a company needs

to come off and have a new company relisted on it.

And this divisor's changed if that

happens at the end of the market so that the next day when

markets open, that index has not changed,

even though, let's say, there's a different company

with a different market cap.

So the way that the S&P 500 is calculated actually

gives us a good idea of what's happening in the large cap US

stock market, which is why it's become one of the most

popular indices in the world.