The Stock Market’s Size Distribution

One of the key aspects to investing that I stress to investors is how skewed things are on Wall Street. By this, I mean there’s a very small group of very, very large stocks. Outside that, there are tons and tons of tiny stocks.

I’m not saying it’s right or wrong, I’m merely pointing out this fact. It’s not hard to mimic the S&P 500 closely by using just a few stocks. Conversely, you can also own a large group that shows little connection to the index.

Check out this chart. The x-axis is companies in the S&P 500. The y-axis is the cumulative market cap of the S&P 500’s market value.

The 10 largest companies in the S&P 500 make up nearly 22% of its value. The top 50 stocks make up nearly half while the other 450 stocks make up the other half. The smallest 210 stocks comprise just 10% of the index which is smaller than the weight of the four largest stocks.

Bear in mind that this is just the S&P 500, so these are already large companies. Yet even within that universe, the big boys dominate.

Below is the chart again but on a log scale for both sides. I believe the line needs to be straight to qualify as a Paretio Distribution. (Please correct me if I’m wrong on that!)

Posted by on February 4th, 2018 at 1:37 pm

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.