What is Standard & Poors 500?

Also called the S&P 500, the Standard & Poors index, which most professional money managers say that they use as the benchmark against which they measure their own investing prowess, is the one that has become the dominant benchmark in U.S. investing in recent years.
Although the S&P is not really the appropriate measure of performance for bonds or the stocks of small-sized companies, nor the apt standard against which to judge international investments, the index is still used to gauge these investments’ performances anyway.
The S&P 500 tracks the performance of 500 stocks, comprised of 400 industrial companies, 40 utilities, 20 transportation companies, and 40 financial firms. A committee at S&P reviews the companies periodically and may replace up to 30 for reasons that include, for example, bankruptcy. The performance of the 500 stocks is run through a computer software program that calculates a daily measure of the market’s rise or fall as well as an overall performance figure. These are the numbers you hear reported on the nightly news, see in the newspapers, and can view on your computer screen if you log on to a personal finance Web site.
The S&P tells you the average performance of the stocks in the index. This performance is reported as both numbers and percentages. If the S&P goes up, your newspaper might report that “ the S&P went up 2 points or 6% today.” When the stock market is doing well the numbers and percentages go up. When it’s doing poorly, they go down. The S&P 500 is home to some of the hottest stocks of the late 1990s, including AOL and Dell, the latter of which gave investors an unrivaled 79.7% average annual return, not for a day, not for a month, but for 10 years. With so much fanfare, the S&P has become the index to beat for mutual fund managers. Outperforming it is cause for celebration — only 1 out of 10 mutual fund managers do so in any five-year period.