Standard & Poor's (S&P): Indexes and Credit Ratings

What Is Standard & Poor's (S&P)?

Standard & Poor's (S&P) is a company well known around the world as a creator of financial market indices—widely used as investment benchmarks—a data source, and an issuer of credit ratings for companies and debt obligations. It's perhaps best-known for the popular and often-cited S&P 500 Index. The company's roots date back to the 1860s. Since 2016, its official corporate name has been S&P Global.

Understanding Standard & Poor's (S&P)

Standard & Poor's grew out of two companies: Poor's Publishing, a publisher of railroad industry guidebooks officially founded in 1868, and the Standard Statistics Bureau (later Company), founded in 1906, which published financial data on companies. In 1923, it released its first stock market indicator, which contained 233 companies. Poor's Publishing, meanwhile, issued its first rating in 1916. The two firms merged in 1941, to create Standard & Poor's.

The McGraw-Hill Cos. purchased S&P in 1966. In 2012, Standard & Poor’s combined its index operations with Dow Jones Indices (which McGraw-Hill owned) to become the leader in stock market indexes.

In 2016, McGraw Hill Financial rebranded itself as S&P Global. S&P Global divisions include S&P Global Ratings, S&P Global Market Intelligence, S&P Dow Jones Indices, and S&P Global Platts. The company has more than 1,500 credit analysts, and more than 1 million credit ratings have been issued on governments, corporations, the financial sector, and securities.

S&P is a major credit risk researcher, covering multiple industries, benchmarks, asset classes, and geographies. It issues credit ratings, ranging from AAA to D, on public and private company debt, as well as governments. It also offers ratings on short-term debt and provides outlook ratings that range from six months to two years.

Standard & Poor's Indexes

The S&P 500 Index launched in March 1957. It was the first index to be computer-generated and to be published daily and has become a stand-in for the U.S. stock market itself.

The S&P 500 Index contains 500 of the largest stocks that trade on the New York Stock Exchange (NYSE) and Nasdaq, making it a tool to gauge the overall health of large American companies. The S&P 500 is probably the single most popular equity index in the world and is used as a performance benchmark for a variety of mutual funds, ETFs, and other assets and securities.

Other popular indexes offered by S&P Global cover different sectors of the market and different market capitalizations. Large offerings from S&P Dow Jones Indices include the S&P SmallCap 600, the S&P MidCap 400, the S&P Composite 1500, and the S&P 900. Each represents a look at market health based on its sub-sector.

S&P 500 Index Futures

The first S&P 500 futures contracts were introduced by the Chicago Mercantile Exchange (CME) in 1982, and carried a notional value of $250 times the value of the S&P 500. The CME added the E-mini contract—valued at $50 times the S&P 500—in 1997 to allow for smaller investments by a wider range of investors. The even smaller micro E-mini, with a multiplier of just $5, was introduced in 2019.

The "E" in E-mini stands for electronic, a reflection of the fact that when E-minis were launched in 1997 they traded exclusively on CME Globex, CME's electronic trading system, rather than in open outcry pits like other futures contracts. Many traders favored the E-mini over the standard contract not only for its smaller investment size but also for its liquidity. Consequently, CME delisted the standard contract in September 2021.

As with all futures, investors are only required to front a fraction of the contract value to take a position. This represents the margin on the futures contract. These margins are not the same as margins for stock trading. Futures margins show "skin in the game" that must be offset or settled.

Standard & Poor's Underlying Ratings (SPURs)

Standard & Poor's Underlying Ratings (SPURs) provide an opinion on a municipality's credit quality separate from guarantor or insurer credit enhancements. Municipal or other public sector bonds typically include credit enhancement which is used to obtain better terms by providing increased assurance that the borrower will honor its obligation through additional insurance or a third-party guarantee. Standard & Poor's issues a SPURs rating only at the request of the issuer/obligor and maintains surveillance of an issue with a published SPUR.

Example of Standard & Poor's Ratings

Standard & Poor's Global Ratings division ranks debt instruments, like bonds, and the companies that issue them, in terms of creditworthiness—defined as the likelihood of default or inability to pay debts in a timely manner. Similar to academic grades, each rating consists of a letter on a scale of A to D, sometimes augmented with a plus or minus sign or a number. The higher the grade, the lower the risk (in S&P's estimation).

A rating of BBB and above is called "investment grade"—the safest sort of investment. Ratings below that are considered "speculative"—a greater degree of risk.

The chart below displays Standard & Poor's rating system for short-term debt—bills, loans, and other obligations with a maturity of one year or less. These are the sort of instruments that money market funds and money market accounts often invest in.

The Bottom Line

Standard & Poor's—officially, S&P Global—is a public company in the financial information and analytics business. Based in the U.S., but with offices around the world, it provides financial market research and intelligence, maintaining widely followed market and securities indexes—the best-known of which, the S&P 500 Index, acts as a barometer of the entire U.S. stock market.

In addition, Standard & Poor's is one of the largest credit rating agencies, assigning letter grades to companies and countries and the debt they issue.