The Standard and Poor 500(S&P) is a market index that is derived from the 500 most sought-after stocks in the NASDAQ and NYSE in the US stock market. It is designed to reflect the risk and return aspects of various stocks in the stated market. The S&P 500 high-low Index, on the other hand, depicts the new highs and new lows encountered on the S&P 500 stocks within the past 52 week period. The index is obtained by dividing the high and low stock values with the total trade volumes within the same interval. Many investors use this indicator on CMC Markets to determine the value of a given stock and to predict its future performance.
Relevance of the S&P Index
While there are several indices that characterize the country’s economic status, the S&P 500 is among the most popular seeing as it offers a broad outlook of the stock market. Finance professionals and traders search for index tools such as the S&P 500 to enable them to control their investments. It is important to note that indexes are interconnected though and because of this, they often move in a similar direction.
Companies in the S&P 500 index for instance move in the same manner as those in the DJIA seeing as both indices cover bigger and lower risk companies. The same applies to the smaller, high-risk companies covered under AMEX and NASDAQ. Note however, since S&P covers close to 70 percent of the total value of the market, it gives a more precise gauge of the market than the Dow Jones does. Nonetheless, if you are looking to invest in the S&P 500, it is important to first evaluate your portfolio and then pick a something that matches it.
Other than giving direction on performance of the market, the S&P also helps in identifying trends and reflecting fluctuations. Despite the fact that the index does not depict the real performance of the total market, it shows the associated risks, and this certainly plays a significant role in increasing or decreasing investor trust.
Application of the S&P 500 in trading
The S&P 500 index gives investors a clear perspective on how the stocks have performed within a particular time frame and with this, they are able to make better investment decisions .This denotes that even an investor who is uncertain about where to invest can apply the indices in selecting the specific stocks to buy. This also gives them a better chance to perform on the same level with the market and avoid underperforming.
On top of that, the index offers a yardstick through which any stock trader can evaluate the performance of their portfolios. This makes it possible for them to find out how well or not their managers are performing with reference to managing of their portfolio, hence their money. The issue of forecasting also comes into play here; by getting to learn the past performance of the index, it becomes easier to predict market trends. All the same, the numbers themselves are not important, what matters is the change in percentage over the prolonged 52 week period as this is what gives an actual indication of whether the market is climbing or falling.
S&P 500 Index: The Bottom Line
The highest and lowest values that a stock trades at in a given year go a long way into providing solid information on the movement of the market after that, and this essentially reinstates the relevance of indexes such as S&P 500 in stock trading. The S&P 500 index indicates how much investors are ready to put in to acquire particular stock based on the expected trends. In general, however, the index goes up when there’s stability and decreases when the economy fluctuates. In connection with this, high low index values above 50 are linked to low levels of volatility while figures below 50 indicate volatility.
Most investors prefer to invest when the price of a stock surpasses the 52 week high and to sell when this figure goes below the 52 week low. By investing at such points, stock traders trust they will have adequate momentum to maintain price movement in a positive direction. On the contrary, other investors sell once the price peaks within the 52 weeks with the hope that it will reduce, or buy at a 52 week low based on the assumption that the value will climb.
Regardless of the case, the most important thing for an investor to do is to understand not just the weightings for the S&P 500, but the selection of stocks as well. It is also essential to be flexible with regard to the changes that may crop up in the stock market as it is only then that funds can be invested and reinvested within reasonable periods.