Simply put S&P 500 is a measure of the performance of the stock markets in the US, which stands for Standard and Poor’s 500 in its full form. It is an index that tracks the prices of the biggest 500 publicly traded companies. The index was started more than a century ago. By 1926 it was tracking 90 stocks, and by 1957, the number had increased to tracking 500 companies.
How the index works
Some of the best-known companies, like Apple, Microsoft and Amazon, are among the biggest names in the index. But each company doesn’t influence the index equally. This is because the S&P 500 is based on weighted market capitalization. Market capitalization, which is also commonly called a market cap, is the product of share price with the total number of shares held by shareholders.
To get to the weights, the 500 biggest companies by market cap are considered. The market cap of a single company is divided by the sum of the market caps of all these companies together to get to its weight. The process is followed for all 500 companies. To get to the index, the weighted average This means that the fluctuations in a company’s price will have an impact on the index based on its weight. A bigger weight will have more influence, and the smaller the weight, the less influence.
How to trade the S&P 500
There are variations in the S&P 500’s performance during the day and over time-based on the prices of its constituents. This can sound risky to a new investor. But it can also be an opportunity. In the past year, for instance, the index has fallen by more than 10%. But over a 10-year period, it has still risen by over 160%.
This brings us to the question of how to trade the index. An interesting trading strategy is to consider its moving average. This average could be over three months, 200 days or even 300 days. When the index starts rising above the average, it means that the index is making gains. This could be a good time to buy. Similarly, when it starts falling below the average, it indicates the time to sell.
Choices available
Which average the investor wants to consider is based on their own assessment. Also, the investor can decide whether to buy some stocks represented in the S&P 500 index or get one if they want to trade the index itself. For investors who want to buy single stocks, the process is straightforward. But to trade the index, there are multiple options available.
One option is exchange-traded funds. These funds track the performance of the S&P 500 and, as a result, provide around the same returns as the index. Derivatives are another way of trading the index. The trader can either buy futures contracts or contracts for difference and make a purchase based on the future value of the S&P 500.
Investing with the right platform
The carry out these trades, it is essential to open an investment account. This is easily done through an online platform like CMC markets. The right trading platform allows traders to trade in a range of assets, including S&P 500 funds and derivatives. Once the account is open, the trader can decide how much they want to invest. If you cannot decide right away, it can be a good idea to maintain a balance in the account. So, if a price of a stock you wanted to buy crashes suddenly, it can be a good time to buy it.
But for newbie traders, figuring out what to trade can be a challenging decision to make too. This is why an S&P 500 index fund is a good place to start. The index, which represents around 80% of the US stock market, can also be seen as a proxy for the economy. So, if the US economy is expected to do well, chances are that the S&P 500 could perform too.
Give it a go
The key takeaway here is that it’s a good idea to give the index fund, at the very least, a try. It saves time from having to stock pick on one’s own. And going by the index’s returns over time, it can be quite profitable to focus on it. For newbie traders, it is easier than ever today to open an investment account.
In fact, for more experienced traders, these platforms also offer the opportunity to trade in derivatives. These trades can be made even for the S&P 500 index, besides for individual stocks, commodities, and currencies. So, if you intend to graduate trading in derivatives in the future, focus on one that allows the option as well, like CMC markets, which provide a wide number of choices.
Disclaimer
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation.
