Standard & Poor's

Standard & Poor's (S&P) is a titan in the world of finance, a name you'll encounter constantly as an investor. It's a leading American financial services company, now part of the larger entity S&P Global, that provides crucial intelligence for the market. Think of S&P as having two main jobs that are vital to investors everywhere. First, it creates and manages some of the world's most-watched stock market indices, which act as a report card for the performance of entire markets or sectors. Second, it issues credit ratings, which are like a financial credit score for companies and even entire countries. These two functions—measuring market performance and assessing creditworthiness—make S&P a cornerstone of the modern financial system. Its analyses and benchmarks are used by millions, from individual investors choosing an ETF to massive pension funds allocating billions of dollars.

S&P's influence stems primarily from its indices and its ratings. Understanding both is key to understanding how markets are measured and how risk is evaluated.

When you hear a news anchor say, “The market was up today,” they are most likely referring to an index, and very often, it's an S&P index.

• The Famous S&P 500: This is the flagship index. It tracks the performance of 500 of the largest and most influential publicly traded companies in the United States. Because it represents about 80% of the total value of the U.S. stock market, it's widely considered the best single gauge of large-cap American equities.
• How It Works: The S&P 500 is a market-capitalization-weighted index. This simply means that companies with a higher total stock market value (like Apple or Microsoft) have a much bigger impact on the index's movement than smaller companies in the list.
• Why It Matters: For most investors, the S&P 500 is the ultimate benchmark. It's the standard against which the performance of most investment managers and individual portfolios is judged. Furthermore, the rise of index funds and ETFs that passively track the S&P 500 allows anyone to “buy the market” with a single, low-cost investment.

If a company or a government wants to borrow money by issuing a bond, investors need to know how likely they are to get paid back. That's where credit ratings come in.

• The Rating Scale: S&P assesses the financial health of an entity and assigns it a letter grade, from AAA (the highest possible rating, indicating an extremely strong capacity to meet financial commitments) all the way down to D (in default, meaning it has already failed to pay its debts).
• Investment Grade vs. 'Junk': Ratings from AAA to BBB- are considered investment grade, suggesting a relatively low risk of default. Ratings of BB+ and below are known as speculative grade, or more colorfully, junk bonds. These carry a higher risk but, to compensate investors, must offer a higher interest rate.
• The 'Big Three': S&P is one of the “Big Three” credit rating agencies, alongside Moody's and Fitch Ratings. Their opinions hold immense sway, influencing the borrowing costs for corporations and governments worldwide.

A savvy value investor uses S&P's tools pragmatically but with a healthy dose of skepticism. For the average person, the legendary value investor Warren Buffett has repeatedly advised against trying to pick individual stocks. Instead, he recommends consistently buying a low-cost S&P 500 index fund. This strategy allows you to benefit from the long-term growth of the American economy without the impossible task of trying to outsmart the market. It's a classic value investing principle applied to the whole market: Don't look for the needle in the haystack. Just buy the whole haystack. When it comes to credit ratings, however, a value investor does their own homework. They know that a rating is just an opinion, not a guarantee. The 2008 Financial Crisis serves as a stark reminder, as S&P and other agencies gave top ratings to complex mortgage-backed securities that turned out to be incredibly risky. A value investor might find an opportunity in a company with a lower credit rating if their own analysis reveals that the company's underlying business is strong and its stock is trading at a discount. They understand a crucial truth: The rating agency tells you about perceived risk, but the price you pay for an asset is what truly determines your potential return and margin of safety.