INVESTING TERMS
What is the
SMALL
The Standard & Poor’s 500, or S&P 500 (.SPX), is an index made up of 500 top American companies and is an indicator of how the U.S. stock market is performing. Financial experts consider the S&P 500 to be one of the most accurate representations of the market. It is also viewed as a leading indicator of the future performance of the U.S. stock market.
Deeper definition
At the most basic level, there are two kinds of stock: preferred and common. Preferred stock is rarer than common stock, generally comprising a small proportion of all shares. It’s often more expensive, and can come with a minimum purchase amount.
Example of the S&P 500
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SMALL CAP?
The value of the S&P 500 continually fluctuates based on the values of the 500 stocks. The S&P 500’s value is calculated by first adding together the market capitalization of all 500 stocks.
SHORT-TERM
CAPITAL GAINS
Profits made from selling assets owned for one year or less.
LONG-TERM
CAPITAL GAINS
Profits made from selling assets owned for more than one year.
Jeff bought a vacation home for $100,000 and used it as a rental property for five years before selling it for $150,000, giving him a capital gain of $50,000.
Since he owned the property for more than one year, he calculated his long-term capital gain based on his tax bracket.
Since his annual income placed him in the 15 percent tax bracket ($37,651 to $91,150 for a single person in 2016), he didn’t have to pay any taxes on the profit.
If Susan pays only the minimum payment of $20 per month, it will take her 11 months to pay off her balance.
EBITDA doesn’t need to be measured by the Securities and Exchange Commission’s accounting standards, the Generally Accepted Accounting Principles (GAAP), so it is not a required line item on a company’s financial statement. EBITDA has become much more common in recent years, although many firms list an adjusted EBITDA figure.
The S&P 500’s average return
between its inception in 1928
and 2014 was 10 percent.
After adjusting for inflation,
the average return was
7 percent. However, this
doesn’t tell the whole story,
as 40 percent of S&P 500
gains have historically been from
dividends. If calculations are made to
account for investors reinvesting the dividends, the rate of return increases substantially. It’s also important to note that these rates of return are averages. The time individuals enter and exit the market significantly impacts the S&P 500’s performance. For example, in 2000 the index declined by approximately 50 percent as the dot-com bubble burst. In March 2009 the index rose 20 percent.
Before the proliferation of
inexpensive computer
technology, it had been very
difficult to create and price
complicated derivative contracts, but this problem was more or less solved by the 1990s, thanks also to the Black-Scholes equation. Mortgage-backed securities became very common investment products. Instead of using derivatives to effectively balance risk, institutional traders began buying them up as ways to create leverage and take on much more risk. When the U.S. housing market began to crumble in 2006 and 2007, MBS investments spread throughout the banking system began to rapidly lose value, precipitating the crisis.
MARKET CAP
VALUE
OUTSTANDING SHARES
SHARE PRICE
OF THE STOCK
When a company issues more shares, the price of an individual share falls. Anti-dilutive preferred stock allows investors to receive more shares of a stock than he original paid for in the event that his are worth less as a result of a dilution.
The measure can be calculated by taking a company’s net income and adding back interest expense, taxes, depreciation, and amortization. Alternatively, it can be calculated by taking a company’s operating profit — EBIT, or earnings before interest and taxes — and adding depreciation and amortization.
Susan opens a credit card with a $1,000 credit limit and an interest rate of 14.99.
She makes a purchase of $200.
Susan understands she will pay interest on the balance until she pays it off, but she decides to carry a revolving balance.
If Susan pays only the minimum payment of $20 per month, it will take her 11 months to pay off her balance.
If shares of Dynaco rise
above $150, the buyer of
the options wins and
Englebert is obligated to
sell 100 shares to the
holder for $150. But if they
never hit the strike price of $150, Englebert wins and gets to keep the $200 premium the buyer paid. If shares of Dynaco get closer to the strike price of $150, the buyer can resell the option and make a profit off his speculative bet, but if shares of Dynaco decline — widening the spread between the strike price and the underlying asset price — the price of the option falls.
$100 million
$2
$20 million
$10 million
– Minus
PRICE PER SHARE
EXPENSES
Equals =
$30 million
NET PROFIT
>$10B
Although the S&P 500 is made up of large-cap stocks, its performance is considered an accurate reflection of the overall market. This is because the market capitalization of these 500 companies makes up approximately 70 percent of the market.
x
=
$10 Billion
PRICE/SHARE
MARKET CAP VALUE
NOT A LARGE CAP COMPANY
OUTSTANDING SHARES
PRICE/SHARE
MARKET CAP VALUE
A LARGE CAP COMPANY
=
63,000,000
$200
$12.6 Billion
Convertible preferred stock can be exchanged for common stock, but not vice versa.
Convertibility:
Anti-dilution:
This is referred to as the index weight. Next, the weight of each company is calculated by dividing the market capitalization of each company by the total index weight. Companies with larger market shares carry more weight on the index. Therefore, their fluctuations have a bigger impact on the index.
The shareholder has the right to redeem her shares for a predetermined amount called a call price.
Callability:
STANDARD
AND POOR'S 500
(S&P 500)?
$300M–$2B
MARKET CAP
VALUE
OUTSTANDING SHARES
SHARE PRICE
OF THE STOCK
There are a couple of ways to invest in the S&P 500. High-net-worth investors can construct
their own personal index funds.
However, this process
requires buying stocks
from 500 companies.
More commonly, investors
buy mutual funds or
exchange-traded funds
that mimic the S&P 500.
OUTSTANDING SHARES
PRICE/SHARE
MARKET CAP VALUE
A SMALL CAP COMPANY
=
30,000,000
$41
$1.23 Billion
The S&P 500 is tracked by Standard and Poor’s, a leading publisher of financial research and analysis. The S&P Index Committee determines which companies to place on the index.
When selecting companies for the index, the committee considers market size, index, liquidity and industry grouping, among other factors. Each company’s market capitalization must be equal to or greater than $5.3 billion. The company must have a minimum monthly trading volume of 250,000 shares in the six months prior to the evaluation date, and at least 50 percent of the company’s stock must be available to the public.
The S&P 500 index is part of the S&P Global 1200 family of indexes. Other members of the S&P Global 1200 family of indexes include the S&P MidCap 400, which measures the performance of stocks based on 400 midsize companies, and the S&P SmallCap 600, which measures stock performance based on 600 small companies.
70%