What Is the Standard & Poor's 500 Index (S&P 500)?

Standard & Poor's is a financial services company owned by McGraw Hill that rates stocks and bonds according to their risk profiles. Standard & Poor's began in 1923 with an index of 233 companies.

The present form of the Standard & Poor's 500 Index (S&P 500) came into being in 1957 when the number of companies grew to 500. Since then, the S&P 500 has become a leading indicator for the overall U.S. stock market. Mutual fund managers use it as a guide to determine how well they are doing. In addition, index funds, such as the Vanguard 500 Index Fund and Exchange Traded Funds (ETFs), are based on the S&P 500. Understanding what the S&P 500 is can help you make a better return on your investments in the stock market.

The designers of the S&P 500 wanted to create an index of large-cap companies that better reflected U.S. stock markets. Up to that time, the Dow Jones Industrial Average had been the leading indicator, but had problems in that it only contained 30 companies and measured change in terms of dollar amounts rather than percentages.