6 Market Innovations Younger Than The S&P 500 Index
The S&P 500 is celebrating 60 years of existence as an index. Launched on March 4, 1957, it consists of an assortment of stocks belonging to diverse sectors and is considered a bellwether for the U.S. economy.
Some Curious Facts About the S&P 500
- The index is weighted by market capitalization, which is price multiplied by outstanding shares of the constituent stocks. In contrast, the Dow Industrials is weighted exclusively by price.
- The eligibility criteria for a stock to be included in the S&P 500 Index include a market cap of $5.3 billion, U.S. headquarters, at least half a year since its IPO and four straight quarters of positive reported earnings.
- The worst annual performance of the index was in 2008, when it lost 38.5 percent.
- Priceline Group Inc (NASDAQ: PCLN) was the first $1000+ member of the S&P 500 Index, having scaled the barrier in 2013.
Even as we weigh in the merits of the broader gauge, let's look at some of the market innovations that can claim to be younger than the S&P 500 index itself.
E-Mini futures and options on the S&P 500 Index were introduced on September 9, 1997. It's an electronically traded futures contract one-fifth the size of standard S&P futures. E-mini S&P 500 futures and options are based on the underlying S&P 500 stock index.
2. Exchange Traded Funds
The Exchange Traded Funds, or ETFs, were introduced in the U.S. in 1993 as investment funds traded on a stock exchange just like a stock. The ETF can hold assets such as stocks, commodities or bonds, with most tracking an index.
The appeal for this instrument stems from its low costs, tax efficiency and stock-like features.
3. Online Trading
The brokerage firms — which took orders from clients through phone or in-person and then executed them on their behalf — slowly began offering retail trading platforms to clients in the 1990s. These platforms allowed individual investors to buy and sell securities over an electronic network.
Apart from the option to buy and sell financial assets, online brokers also provide tools to help investors research and select investments.
4. Interest Rate Swaps
This liquid financial derivative instrument became prominent in 1980s after macroeconomic conditions forced investors to be more aware of the need to hedge certain types of risk. An interest rate swap is a contractual agreement between two parties to exchange interest payments. This is used for both speculating and hedging.
5. Black-Scholes Model
A mathematical innovation that came after the S&P 500 is the Black-Scholes model. This was developed in 1973 and led to the explosive growth of the options market.
The Black-Scholes model, also known as the Black-Scholes-Merton model, is a model of price variation of financial instruments such as stocks over time that can, among other things, be used to determine the price of a European call option.
6. Open IPOs
OpenIPO is a modified Dutch auction which allows shares of an IPO to be allocated in an impartial way, with the successful bidders paying the same price per share. The highest bidders win in an OpenIPOauction, but the entire auction is private and winning bidders all pay the same price per share — the public offering price.
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