Week 7 Day 1: What Is the S&P 500?

Instead of picking one stock and hoping it does well, the S&P 500 gives you instant diversification across America's biggest and most successful companies. If one company struggles, the others carry it. You are not betting on one horse -- you are betting on the entire race.

The S&P 500 is not a random collection of companies. It is curated by a committee at S&P Global that selects companies based on market capitalization, liquidity, sector representation, financial viability, and public float. Companies are added and removed regularly, which means the index is self-cleaning: failing companies get dropped and successful ones get added. You are always holding the current 500 strongest. This is why 'buying the S&P 500' is fundamentally different from 'buying 500 specific stocks.' The index evolves. In 1990, the top holdings were IBM, Exxon, and GE. Today they are Apple, Microsoft, and Nvidia. You did not have to predict that shift. The index did it for you automatically.

The S&P 500 is market-cap weighted, meaning larger companies have greater influence on the index's performance. Apple, with a market cap of roughly $3 trillion, has about 7% of the index weight, while the smallest S&P 500 company might be 0.01%. This means the index is not equally diversified -- it is heavily concentrated in the top 10 holdings, which typically represent 25-35% of the total index. Critics argue this creates concentration risk. Proponents argue it reflects economic reality: the largest companies drive the most economic value. The Herfindahl-Hirschman Index (HHI) of the S&P 500 has increased notably since 2015 due to mega-cap tech dominance, reaching levels not seen since the late 1990s dot-com era. This is worth understanding but not necessarily worth acting on for the long-term investor.