The S&P 500 (SPX) is largely considered the most important benchmark index in the United States, and the world due to its sheer size and broad make-up of companies from every major sector of the economy. The index consists of the top 500 companies from the New York Stock Exchange and NASDAQ, and is weighted by market capitalization. It captures approximately 80% of all available market capitalization in the United States.
How to trade the S&P 500
Futures – The Chicago Mercantile Exchange (CME) is home to the S&P 500 futures contract. The large contract’s exchange code name is “SP”. The value is calculated by taking the current price of the S&P 500 and multiplying it by $250. Margin, also known as a performance bond, is set at a fraction of the index’s full value and determined by the exchange. The margin requirement for a large contract is quite high, currently in 2016 it is over $26,000 per contract.
There is a smaller version called an “e-mini”, which has a multiplier of $50, or five-times smaller than the large contract. The exchange code name is “ES”. This is a very popular contract due to its accessibility to the small trader and flexibility for position size. The e-mini contract is highly liquid and trades nearly 24-hours a day 5-days a week. Both long and short positions can be established.
There are four expiration months – March, June, September, and December.
Exchange Traded Fund (ETF) – The SPDR S&P 500 ETF known by the ticker symbol – SPY – is a very popular way for market participants to trade the S&P 500. It is designed to correspond to the price movements of the S&P 500 index.
The SPY ETF trades on the NYSE ARCA Exchange during normal stock exchange hours from 9:30 – 4:00 EST, as well as extended pre and post-market exchange hours. It has extremely high liquidity.
The SPY requires less capital than futures, but cannot be traded around the clock, so the trader is exposed to gap risk. It is accessible to most individuals without having to be pre-qualified to trade futures or options. Like futures, traders can take advantage of price fluctuations in both directions by buying or shorting.
Index funds – These are funds which have portfolios which mimic the price fluctuations of the S&P 500. They have low turn-over and thus charge lower fees than other types of funds. Index funds are meant for the long-term investor, and not used as an active trading vehicle. Generally, index funds are long-only.
Options – Options are available for both futures and the ETF. It is suggested that one familiarize themselves with how options work before trading them. This is one of the least capital intensive ways to trade the S&P 500, as options premiums can be as low as a few dollars per contract. Traders can use options as a hedge or to speculate on the direction of the index, both up and down.
Contract for Difference (CFD) – This instrument was designed with the small trader or investor in mind. CFDs are constructed with futures contracts, but made into smaller contracts which require significantly less margin than futures contracts. Just like futures, these trade nearly 24-hours a day, 5-days a week. Most traders in the world outside of the United States have access to a broker who offers CFDs. These can be traded in both directions, long and short.
What impacts the S&P 500
Macro-economic conditions weigh significantly on this index as it is highly reflective of the broader US economy. The direction of the US economy and the Federal Reserve’s position on monetary policy have a large impact on the index.
Because the index is so broad in nature, it is also considered to be a forward-looking mechanism for the economy. Often times market participants will sell stocks in anticipation of a weakening economy before it arrives, driving down the S&P 500 prior to a slowdown or recession. Conversely, before a slowdown or recession ends, the S&P 500 will often times recover significantly beforehand.
The S&P 500 is made up made up of ten main sectors. The top 3 sectors alone make up nearly 50% of the index at this time (7/2016) – information technology, financials, and healthcare. The other seven sectors in order of current weighting are: consumer discretionary, consumer staples, industrials, energy, utilities, telecommunications, and materials. The health of the companies in the dominating sectors have a large impact on the direction of the broad index.
Earnings are reported on a quarterly basis each year. The majority of these companies report results in the month following the end of its latest fiscal quarter – April, July, October, and January.