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Trading the S&P 500

The Standard & Poor’s 500 index, also known as the S&P 500, is one of the most popular indexes used for trading or benchmarking the US equities market.

Traders and fund managers tend to prefer the S&P 500 Index to the Dow Jones because it represents more US shares, particularly the more liquid issues with a market capitalization of above $3 billion.

The index is driven by the prices of the 500 shares that comprise it. To be included, a company must have at least half of its value in shares listed on a US exchange. Because of the way the index is calculated, larger companies will have more influence over its behaviour than smaller ones. At time of writing, some of the largest companies in the S&P 500 were Apple, Microsoft, Exxon and Johnson & Johnson.
Because the index is spread across 500 companies, the S&P 500 will tend to be less volatile than narrower indexes, composed of fewer shares. However, during times of particular crisis, it can also exhibit high volatility levels – for example, in 2002 it lost 23% as a consequence of the dot com crash. Similarly, in 2008, during the financial crisis, it lost over 38% of its value, then bounced back with a 23% gain in 2009.

Still, as a stock market index, the S&P 500 is a lot less volatile than many other markets, including individual shares, currencies and commodities.

The S&P 500 is widely available in a range of wrappers, including as an Exchange Traded Fund. The first ETF to be launched in the US tracked this index. It is also available as a future or option contract, or as a Contract for Difference. UK residents can trade the index through a tax-free Spread Betting broker. Many index-linked investment products will also track it.

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