The SP 500 index - How to invest in the S&P500
The SP500 is a stock index in which 500 of the largest companies in the United States are traded. It is managed by the Standard & Poor's financial rating agency. If you are thinking of investing in the SP500, this article is for you!
Table of Contents
- What is the S&P 500?
- 5 curiosities of the SP 500 Index
- Composition of the SP500 index
- Requirements for a company to enter and trade in the S&P 500 index
- SP500 Companies
- When is the best time to trade the SP500?
- Is it a good time to invest in the SP500?
- How the coronavirus has affected the SP500
- CFD SP500 technical analysis
- Advantages of the SP500
- Disadvantages of the SP500
- Relationship between the SP500 and VIX
- How to use the VIX to trade on the SP500?
- How to Invest in the SP500 with MetaTrader
- Why invest in the S&P500 with Admiral Markets
- SP500 CFD Features
What is the S&P 500?
The S&P 500 Index was created on March 4, 1957, by Standard & Poor's, a financial rating company formed in 1941 from a merger between Standard Statistics Company and Poor's Publishing. In fact, the SP500 index is an acronym for Standard and Poor's 500. The S P 500 index symbol is associated with several ticker (trading) symbols: INX, ^GSPC, and $SPX.
Its origin dates back to 1923 when Standard and Poor's included the 233 most representative companies of that time in the same index. It wasn’t until 1957 that this index was extended to the 500 most represented companies and they gave it the name and extension it has today.
Since then, the SP500 has dethroned the Dow Jones 30 as the most representative index in the US stock market. Additionally, its value takes into account the market capitalization of the companies that comprise it, while the Dow Jones is based exclusively on stock prices.
➤ In other words, a change of one dollar in an SP500 share of a large company will therefore have a greater impact on the index than that of a smaller company. That is why the SP500 is a more representative index.
This index is listed on the Wall Street market, which is the most important in the world and includes the 500 most representative listed companies on the American NYSE market.
It is the reference index worldwide and this is why it’s the most followed by investors, since it’s assumed to be the index with the highest global representation, from a sectorial and also market point of view. as far as variable income is concerned.
The S&P500 index represents the economic evolution of the US market and economy, so there are many traders interested in investing in it.
You can invest in the SP500 index through our MetaTrader 5 platform. If you don't have it downloaded yet, click on the banner below. It's free!
Some other indexes and funds are related to the S&P 500, such as:
- NT S P 500 index: This is the Northern Trust Collective S&P 500 Index Fund. Its primary goal is to approximate the return and risk characteristics of the S&P 500. Investors commonly use this index to represent the large-cap U.S. equity market.
- S&P 500 Growth Index: This index is made up of the growth companies from the S&P 500 Index.
However, in this article, I will focus only on the S&P500.
5 curiosities of the SP 500 Index
✳️ The SP500 index doesn’t contain 500 shares
✳️ The SP500 was created in 1954, but Standard & Poor's had been following the evolution of equities since 1923.
✳️ Of the original 500 companies on the SP500 index, only 86 were still included on its 50th anniversary.
✳️ When the SP500 index was created, stocks only belonged to three business sectors: Industry, Utilities, and Rail.
✳️ The S&P 500 is the first index to be published daily.
Composition of the SP500 index
Before deciding whether to invest in the SP500 index in the long or short term, it is important to know its composition.
The S&P 500 index is made up of more than 500 shares issued by 500 of the major companies listed on the US stock market, of which it covers approximately 80%.
⚠️ The SP500 has more stocks than companies because the index includes 2 classes of stocks for some of its companies.
As in the case of the Spanish index, the IBEX 35, it’s not always the same companies that make up this index - some enter and others leave. In this case, the body that decides the entities that make up said index and, therefore, has decision-making power over the entities that enter or leave it, is the S&P Dow Jones Indices, owned by Standard and Poor's.
Requirements for a company to enter and trade in the S&P 500 index
✔️ Market capitalization must be equal to or greater than $4 billion.
✔️ The ratio between the market capitalization and the annual volume traded in dollars must be greater than 1.
✔️ The volume of shares traded per month must be at least 250,000 shares in the 6 months prior to the valuation date.
It’s important to remember that when you invest in the SP500 you are investing in a group of companies.
Companies such as Apple, Amazon, Google, Microsoft, Facebook, Berkshire, JPMorgan, Exxon, Johnson & Johnson and Bank of America are some of those that make up the list of entities on this famous and reputed index.
In the following image we can see the top 10 companies by weighting that are a part of the S&P 500:
Source: S&P Dow Jones Indices. Added on Jan 14, 2020
Some companies are more important than others by capitalization, such as Apple or Amazon. However, if we talk about sectors, in this case, the main sectors, not only in the S&P 500, but in general in the US economy, these are Technology, Health, Finance and Communication, in the same order of importance.
Below we can see the percentage weighting of the sectors that make up the S&P 500 today:
Source: S&P Dow Jones Indices. Added on Jan 14, 2020
Below you will see a table with the 'top ten' SP500 companies in terms of trade volume. The S&P 500 list is subject to change and is valid as of the date of publication (01/14/2021. Source: Infobolsa).
|2||Ford Motor||89.55 M|
|5||General Electric||53.71 M|
|6||General Motors||49.23 M|
|7||Bank of America||43.17 M|
|8||American Airlines||42.63 M|
|10||Wells Fargo||35.73 M|
When is the best time to trade the SP500?
We could say that the best time to invest in the SP500 index from England is from 2:30 p.m. to 9:00 p.m. (3:30 p.m. to 10:00 p.m. on the MetaTrader platform)
➨ When the US session starts, the Asian markets have already been closed for about two hours, but in Europe, it is still daylight and the European trading sessions are not yet closed. The most important volumes are exchanged at that time!
➨ Once the activity in the US markets ends, there is a drop around 22:00, until the opening of the Asian markets.
That’s not all!
The US economic calendar is very rich in publications, which influences the price of the SP500 index and will affect our investments in it.
This is why many S&P 500 traders love to trade based on the economic calendar. This allows trading for only a few minutes around post hours, which sometimes triggers wide movements!
Learn more about this index and other markets with our free trading webinars! Reserve your place here:
Is it a good time to invest in the SP500?
Is SP 500 a good investment? To determine whether the SP 500 is a good investment, we need to look at some details. We are going to offer an analysis of how this index has evolved on the stock market in recent years and what movements it could make in the future to help answer this question.
How the coronavirus has affected the SP500
The Federal Reserve approved up to three interest rate cuts in 2019 (the first since 2008), leaving them in a range of between 1.5% and 1.75%.
The arrival of the coronavirus in Europe and the US and the consequent panic in the financial markets led the FED to announce on March 3 its first rate-cut for 2020, to a range of 1% - 1.25%.
Two weeks later, on March 15, with the coronavirus pandemic out of control, the Federal Reserve was forced to a new and drastic decline, to the 0% - 0.25% range.
The FED reacted in this way to curb the high volatility and alleviate the uncontrolled falls in equity markets as a result of the pandemic, due to investors' panic of an imminent economic recession.
In the following S P 500 index live chart, we can see how the uptrend in the CFD SP500 is interrupted with the outbreak of the coronavirus crisis.
Source: Admiral Markets MetaTrader 5 Supreme Edition. Weekly CFD SP500 chart. Date range: July 29, 2018, to January 14, 2021. Prepared on January 14, 2021. Please note that past performance does not guarantee future returns.
Perhaps you are still curious: what is S$P 500 return for the year 2020? Despite the effects of the coronavirus, the annual percent change in the index was +16.26%,
CFD SP500 technical analysis
Let us now see an evolution of the stock index. Let's take a look at the following SP500 trading chart:
Source: Admiral Markets MetaTrader 5 Supreme Edition. Weekly CFD SP500 chart. Date range: November 1, 2015, to January 14, 2021. Prepared on January 14, 2021. Please note that past performance does not guarantee future returns.
As we have already mentioned, the sharp drop in the price corresponds to the beginning of the coronavirus pandemic. Just before that moment, the index had hit an all-time high at 3400 points.
The price of the SP500 rallied and managed to hit a new all-time high at 3,588 points on September 2, 2020. The next day there was a general decline in tech stocks. This fall dragged indices down, one of them being the SP500, as shown in the graph.
The price of the index reached the 23.6 Fibonacci retracement level, a level reached several times, where it finally pushed past the previous high and recently marked a new all-time high at 3829 points.
This rise has been driven by strong expectations of a stimulus package provided by US President Joe Biden. Additionally, he’s argued that his government's economic package will also include unemployment insurance and rent forgiveness. This data, together with the vaccine data, has favoured an uptrend.
From the minimum reached as a result of the coronavirus to the present time, there has been a 75% rise. We will have to be aware of the next news in case there is a price correction or if it continues with its upward trend.
Will we see the SP500 at the 4000 level?
Before deciding on whether or not to invest in the SP500 index, it is important to take a look at the advantages and disadvantages that it may have:
Advantages of the SP500
✅ Don't miss out on any trading opportunities. The US stock market opens at a fixed time and closes at a fixed time. Therefore, the session is spread throughout the trading hours in real-time on our MT4 or MT5 Supreme Edition platform.
✅ You can benefit from the movements in the market opening.
✅ You have a very competitive spread to achieve better results in your positions in the S&P500.
✅ Trading an SP500 CFD gives you access to a financial product related to the economy and news on US companies, allowing stock market enthusiasts to easily and quickly intervene in the US market index.
Disadvantages of the SP500
❌ Gaps can be a disadvantage for some traders and real opportunities for others.
❌ Leverage. This is the ability to speculate with large amounts, which is double-edged. So, leverage can be a disadvantage when used incorrectly.
The best way to find out if you’re interested in trading the SP500 is through a demo trading account. You can try different strategies with virtual funds, so there’s no risk. It's free!
Relationship between the SP500 and VIX
The Volatility Index, or VIX index, is the reference index to measure the volatility of the market. In this case, it takes the Chicago options market as a reference and replicates the S&P 500 index. That is, if the VIX increases - also known as the 'panic indicator' - it means that the volatility in the SP500 is increasing, and vice versa.
The VIX was created in 1993 by the CBOE (Chicago Board Options Exchange) and represents the average volatility of the last 30 days.
It is also known as the panic index because an increase in volatility often makes traditional investors prefer to be liquid and not take risks until volatility subsides.
➨ A normal VIX is when it is between 20 and 30.
➨ Whenever it is at levels below 20 it means that the market is calm and, therefore, there is no volatility. This can lead to some apathy when it comes to trading.
➨ On the contrary, if prices are above 30, it means that there is volatility and, therefore, nervousness and panic.
We currently see the VIX levels around 28 (February 26, 2021) a level well below that of previous months.
How to use the VIX to trade on the SP500?
You can trade the SP500 based on the VIX.
⇨ For example, if the VIX is rising and we see falls in the market (in this case in the S&P 500) it means that there is pessimism and that prices should prolong the falls.
⇨ On the other hand, if while the VIX increases, the market rises, this means that optimism is increasing and that prices should prolong the impulses.
Either way, an increase in the VIX (hence increased volatility) means that the markets are going to move more aggressively, which is good for some assets, such as the DAX30, the Forex market, the SP500 and many more.
On the contrary, if the VIX decreases, regardless of the market direction, volatility decreases and, therefore, prices will move less in the corresponding direction.
An increase in the VIX will lead to strategies in favour of volatility. A decrease in the VIX will lead to strategies against volatility. This type of strategy can be carried out efficiently with derivatives, such as Financial Options and CFDs (Contracts for Difference).
How to Invest in the SP500 with MetaTrader
If the S&P 500 index does not appear in the MetaTrader by default, you must add it by following these steps:
- Open the "Market Watch" table
- Right-click on it
- Select the option "Symbols"
- In the search engine, enter SP500
- Click the SP500 symbol
- Click the "show symbol" button and then OK
You now have the SP500 CFD in your Market Watch table! Now you just have to right-click on it and click on "chart window" to start trading.
Also, remember that you can operate a mini SP500. Instead of opening a trade with a volume of 1 lot, it can be 0.1 lots, which is equivalent to a mini lot.
If you have doubts about which instrument to trade or whether to invest in the Nasdaq or SP500, read the following sections, which will show you the trading conditions of this instrument.
Why invest in the S&P500 with Admiral Markets
Are you looking for a broker to invest in the SP500? Admiral Markets is your best partner for CFD SP500 trading. Here are some reasons:
✔️ Admiral Markets spreads are very competitive: you can trade the SP500 with a typical spread of 0.4 points.
✔️ Wide range of assets: trading CFDs on Forex, indices, stocks, commodities.
✔️ Admiral Markets has the best trading platforms, adapted to all operating systems.
✔️ Negative balance protection policy.
✔️ Very attractive trading conditions: no minimum stop loss, no requotes, ultra-fast order execution.
SP500 CFD Features
In the "Contract specifications" section of our website, you can see the conditions for operating with the SP500.
These are the most important aspects to take into account before opening a position on the SP500:
- Typical spread: 0.4 pips
- Minimum contract size: 0.1 lots
- Maximum contract size: 500 lots
- Minimum Retained Margin%: 0.2 (Retail Clients 5)
- No commissions for opening and closing orders
- 3-day SWAPs: Friday
- Symbol: [SP500]
- SP500 trading hours (EET): 01:00 - 23:15 from Monday to Friday. Pre-close: 23:00 on Friday
Remember: you can also short the SP500 with an account:
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