What is the S&P 500?
The S&P 500 is a stock market index that is viewed as a measure of how well the stock market is performing overall. It includes around 500 of the largest U.S. companies.
The S&P 500 is a stock market index that measures the performance of about 500 companies in the U.S. It includes companies across 11 sectors to offer a picture of the health of the U.S. stock market and the broader economy.
What companies are included in the S&P 500?
To be eligible for the index, companies must meet certain criteria. Among other things, companies must:
Have a market capitalization — which refers to the total value of the company’s outstanding shares — of at least $8.2 billion.
Be based in the U.S.
Be structured as a corporation and offer common stock.
Be listed on an eligible U.S. exchange. (Real estate investment trusts, known as REITs, are eligible for inclusion.)
Have positive as-reported earnings over the most recent quarter, in addition to over the four most recent quarters added together.
Thanks to this criteria, only the country’s largest, most stable corporations can be included in the S&P 500. The list is reviewed and updated quarterly.
Can you buy S&P 500 stock?
The S&P 500 isn’t a company itself, but rather a list of companies — otherwise known as an index. So while you can’t buy S&P 500 stock, you can buy shares in an index that tracks the S&P 500.
In fact, this is one of the best ways for beginner investors to get their feet wet in the stock market. Here are some of the most popular index funds that track the S&P 500:
Vanguard 500 Index Investor Shares (VFINX)
Fidelity 500 Index Fund (FXAIX)
Schwab S&P 500 Index Fund (SWPPX)
T. Rowe Price Equity Index 500 Fund (PREIX)
Institutional Traders vs. Retail Traders
Trading securities can be as simple as pressing the buy or sell button on an electronic trading account. More sophisticated traders, however, may opt for more complex trades by setting a limit price on a block trade that is parsed over many brokers and traded over several days. The differences lie in the type of trader, and there are two basic types: retail and institutional.
Retail traders, often referred to as individual traders, buy or sell securities for personal accounts. Institutional traders buy and sell securities for accounts they manage for a group or institution. Pension funds, mutual fund families, insurance companies, and exchange traded funds (ETFs) are common institutional traders.
Several of the advantages institutional traders once enjoyed over retail investors have dissipated. The accessibility of sophisticated online brokerages, the ability to trade in and receive more diverse securities (such as options), real-time data, and the widespread availability of investment data and analysis have narrowed the gap.
The gap has not completely closed, though. Institutions still have numerous advantages, such as access to more securities (IPOs, futures, swaps), the ability to negotiate trading fees, and the guarantee of best price and execution.
Institutional traders have the ability to invest in securities that generally are not available to retail traders, such as forwards and swaps. The complex nature and types of transactions typically discourage or prohibit individual traders. Also, institutional traders often are solicited for investments in IPOs.
Institutional traders negotiate basis point fees for each transaction and require the best price and execution. They are not charged marketing or distribution expense ratios.
Because of the large volume, institutional traders can greatly impact the share price of a security. For this reason, they sometimes may split trades among various brokers or over time in order to not make a material impact.
The larger the institutional fund, the higher the market cap institutional traders tend to own. It is more difficult to put a lot of cash to work in smaller-cap stocks because the traders may not want to be majority owners or decrease liquidity to the point where there may be no one to take the other side of the trade.
Retail traders typically invest in stocks, bonds, options, and futures, and they have minimal to no access to IPOs. Most trades are made in round lots (100 shares), but retail traders can trade any amount of shares at a time.
The cost to make trades might be higher for retail traders if they go through a broker that charges a flat fee per trade in addition to marketing and distribution costs. The number of shares traded by retail traders usually is too few to impact the price of the security.
Unlike institutional traders, retail traders are more likely to invest in small-cap stocks because they can have lower price points, allowing them to buy many different securities in an adequate number of shares to achieve a diversified portfolio.
What is a Future?
A futures contract is the obligation to sell or buy an asset at a later date at an agreed-upon price. Futures contracts are a true hedge investment and are most understandable when considered in terms of commodities like corn or oil. For instance, a farmer may want to lock in an acceptable price upfront in case market prices fall before the crop can be delivered. The buyer also wants to lock in a price upfront, too, if prices soar by the time the crop is delivered.
Let’s demonstrate with an example. Assume two traders agree to a $50 per bushel price on a corn futures contract. If the price of corn moves up to $55, the buyer of the contract makes $5 per barrel. The seller, on the other hand, loses out on a better deal.
The market for futures has expanded greatly beyond oil and corn. Stock futures can be purchased on individual stocks or on an index like the S&P 500. The buyer of a futures contract is not required to pay the full amount of the contract upfront. A percentage of the price called an initial margin is paid.
For example, an oil futures contract is for 1,000 barrels of oil. An agreement to buy an oil futures contract at $100 represents the equivalent of a $100,000 agreement. The buyer may be required to pay several thousand dollars for the contract and may owe more if that bet on the direction of the market proves to be wrong.
What is a Trading Option?
Options are conditional derivative contracts that allow buyers of the contracts (option holders) to buy or sell a security at a chosen price. Option buyers are charged an amount called a “premium” by the sellers for such a right. Should market prices be unfavorable for option holders, they will let the option expire worthless, thus ensuring the losses are not higher than the premium. In contrast, option sellers (option writers) assume greater risk than the option buyers, which is why they demand this premium.
An options contract gives an investor the right, but not the obligation, to buy (or sell) shares at a specific price at any time, as long as the contract is in effect. By contrast, a futures contract requires a buyer to purchase shares—and a seller to sell them—on a specific future date, unless the holder’s position is closed before the expiration date.
Options and futures are both financial products investors can use to make money or to hedge current investments. Both an option and a future allow an investor to buy an investment at a specific price by a specific date. But the markets for these two products are very different in how they work and how risky they are to the investor.
Options are based on the value of an underlying security such as a stock. As noted above, an options contract gives an investor the opportunity, but not the obligation, to buy or sell the asset at a specific price while the contract is still in effect. Investors don’t have to buy or sell the asset if they decide not to do so.
Options are a derivative form of investment. They may be offers to buy or to sell shares but don’t represent actual ownership of the underlying investments until the agreement is finalized.
Buyers typically pay a premium for options contracts, which reflect 100 shares of the underlying asset. Premiums generally represent the asset’s strike price—the rate to buy or sell it until the contract’s expiration date. This date indicates the day by which the contract must be used.
Types of Options: Call and Put Options
There are only two kinds of options: Call options and put options. A call option is an offer to buy a stock at the strike price before the agreement expires. A put option is an offer to sell a stock at a specific price.
Let’s look at an example of each—first of a call option. An investor opens a call option to buy stock XYZ at a $50 strike price sometime within the next three months. The stock is currently trading at $49. If the stock jumps to $60, the call buyer can exercise the right to buy the stock at $50. That buyer can then immediately sell the stock for $60 for a $10 profit per share.
What is a Contract Trading?
Contract trading is a method of trading assets that allow traders to access a larger sum of capital through leveraging from a broker. In simple terms, contract trading allows traders to borrow capital to open trades with a larger margin to secure a potentially higher profit.
Also known as margin trading, contract trading a type of derivative — a financial instrument that derive their value from an underlying asset (stock, commodity, currency, etc). The derivative instrument can be traded independently of the underlying asset. In other words, you don’t need to own the underlying asset to trade contracts.
Margin trading is popularly used in the forex market where the market volatility is relatively low. On the other hand, the crypto market is highly volatile and presents a much more lucrative opportunity for traders to make larger profits (while also facing a potentially bigger risk).
What Is a Strike Price?
A strike price is the set price at which a derivative contract can be bought or sold when it is exercised. For call options, the strike price is where the security can be bought by the option holder; for put options, the strike price is the price at which the security can be sold.
What is a Price Target?
A price target is an analyst’s projection of a security’s future price. Price targets can pertain to all types of securities, from complex investment products to stocks and bonds. When setting a stock’s price target, an analyst is trying to determine what the stock is worth and where the price will be in 12 or 18 months. Ultimately, price targets depend on the valuation of the company that’s issuing the stock.
Analysts generally publish their price targets in research reports on specific companies, along with their buy, sell, and hold recommendations for the company’s stock. Stock price targets are often quoted in the financial news media.
A price target is a price at which an analyst believes a stock to be fairly valued relative to its projected and historical earnings. When an analyst raises their price target for a stock, they generally expect the stock price to rise.
Conversely, lowering their price target may mean that the analyst expects the stock price to fall. Price targets are an organic factor in financial analysis; they can change over time as new information becomes available.
What is a Gap?
n volatile markets, traders can benefit from large jumps in asset prices, if they can be turned into opportunities. Gaps are areas on a chart where the price of a stock (or another financial instrument) moves sharply up or down, with little or no trading in between. As a result, the asset’s chart shows a gap in the normal price pattern. The enterprising trader can interpret and exploit these gaps for profit. This article will help you understand how and why gaps occur, and how you can use them to make profitable trades.
Gaps occur because of underlying fundamental or technical factors. For example, if a company’s earnings are much higher than expected, the company’s stock may gap up the next day. This means the stock price opened higher than it closed the day before, thereby leaving a gap. In the forex market, it is not uncommon for a report to generate so much buzz that it widens the bid and ask spread to a point where a significant gap can be seen. Similarly, a stock breaking a new high in the current session may open higher in the next session, thus gapping up for technical reasons.
Gaps can be classified into four groups:
- Breakaway gaps occur at the end of a price pattern and signal the beginning of a new trend.
- Exhaustion gaps occur near the end of a price pattern and signal a final attempt to hit new highs or lows.
- Common gaps cannot be placed in a price pattern—they simply represent an area where the price has gapped.
- Continuation gaps, also known as runaway gaps, occur in the middle of a price pattern and signal a rush of buyers or sellers who share a common belief in the underlying stock’s future direction.