Standard & Poor's (S&P) is a global leader in financial market indices, providing essential data and credit ratings that play a crucial role in investment benchmarks. The company’s flagship offering, the S&P 500 Index, is one of the most cited financial metrics, serving as a reflection of the overall health of the U.S. stock market. S&P's roots trace back to the 1860s, and since 2016, the entity has operated under the corporate name of S&P Global.
Key Takeaways
- Provider of Benchmarks: S&P is recognized as a principal index provider and data source for independent credit ratings.
- Acquisition History: In 1966, the McGraw-Hill Companies acquired S&P. The company was rebranded as S&P Global in 2016.
- Credit Ratings: S&P employs a letter-grade system (AAA to D) to rate the creditworthiness of entities, including companies and governments.
- Investment Basis: The S&P 500 is widely used for various investment vehicles such as mutual funds, ETFs, and futures contracts.
A Brief History of Standard & Poor's
Standard & Poor's emerged from two significant predecessors: Poor's Publishing and the Standard Statistics Bureau. Poor's Publishing was established in 1868 and was initially focused on the railroad industry. Meanwhile, the Standard Statistics Bureau, founded in 1906, published vital financial information on publicly traded companies. The first joint stock market indicator was released in 1923, featuring 233 companies. The merger of the two firms in 1941 paved the way for the creation of Standard & Poor's we know today.
The company's trajectory continued to evolve, and in 1966, it was acquired by the McGraw-Hill Companies. In 2012, S&P's index operations were merged with Dow Jones Indices, solidifying S&P's leading position in stock market indices. The rebranding to S&P Global in 2016 signified a broadening scope of services beyond traditional indices and ratings.
Credit Ratings and Their Significance
S&P Global is a preeminent credit rating agency, employing more than 1,500 credit analysts and issuing over a million credit ratings worldwide. The agency assesses investment risks and assigns ratings on a scale of AAA to D. These ratings are crucial for investors as they indicate the risk associated with potential investments:
- Investment Grade: Ratings of BBB and above denote a lower risk of default and are considered safer investments.
- Speculative Grade: Ratings below BBB indicate higher risk and greater chances of default.
The rating system is not only a framework for assessing corporate debt but also a tool for governments and municipalities seeking credit insight on bonds.
Popular Indexes from S&P
The S&P 500 Index, which launched in 1957, is one of the world’s most well-known equity indices. It tracks 500 of the largest companies listed on the New York Stock Exchange (NYSE) and Nasdaq, providing an essential barometer for the overall equity market. The breadth of S&P’s index offerings includes other significant indices, such as:
- S&P SmallCap 600
- S&P MidCap 400
- S&P Composite 1500
- S&P 900
These indices are vital for investors seeking to understand market trends across various sectors and capitalizations.
Futures Trading with S&P 500
The S&P 500 Futures market offers avenues for investors seeking exposure to the index with different contract sizes. The original S&P 500 futures contracts, introduced in 1982, had a notional value of $250 times the S&P 500 index. The introduction of the E-mini contract in 1997 enabled smaller investments and wider participation in futures trading. The Micro E-mini, introduced in 2019, further lowered the barrier for entry.
Futures contracts require a margin payment, which is a fraction of the total contract value, giving investors an opportunity to manage risk while maintaining capital effectiveness.
Standard & Poor's Underlying Ratings (SPURs)
Standard & Poor's Underlying Ratings (SPURs) focus on evaluating the credit quality of municipalities independently of any enhancements provided by guarantors or insurance. This rating system is especially relevant in the municipal bond market, where credit enhancements might obscure a direct assessment of a municipality’s fundamental creditworthiness.
SPURs ratings are only issued upon request and are closely monitored by S&P to ensure accurate reflections of credit risk.
Conclusion
Standard & Poor's plays a pivotal role in shaping investment decisions through its renowned indices and comprehensive credit ratings. As an essential player in global finance, S&P provides investors and financial institutions with the necessary tools to assess risks and make informed decisions. Understanding the history, offerings, and impact of Standard & Poor's is fundamental for anyone navigating the complexities of financial markets.