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Published: May 11, 2022 12 min read
Smart Phone With S&P 500 Index On Screen
Money; Getty Images

If you want to invest in a wide swath of U.S. companies without having to hand-pick individual stocks, funds that track the S&P 500 index are a good option.

The index includes the stocks of a broad variety of large companies — think everything from Amazon to Disney to Morgan Stanley. That means you can have a slice of ownership in brands you know, but don't need to meticulously sift through financial reports and company filings to determine which businesses' stocks you want to purchase.

The S&P 500 certainly shouldn't make up your entire stock portfolio, since it's important for diversification purposes to also have smaller and international companies that may help your portfolio weather market volatility. And if you do want to have a say over which companies your money is going towards, you don't have that control when you invest in an index fund.

Still, the S&P 500 can be a way to get exposure to hundreds of companies, some of which are primed to change our futures, and some of which have been staples in our lives for decades. Here is what you need to know about buying the S&P 500.

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What is the S&P 500?

The S&P 500 is an index made up of 500 of the largest companies in the U.S.

Officially called the Standard & Poor’s 500 and created by the company Standard & Poor's, the S&P 500 is a market-capitalization-weighted index. This means that the individual components of the index — the stocks — that have a higher market capitalization are weighted more heavily in the index. In other words, if a company in the index with a high market capitalization starts performing especially well or poorly, the change will impact the index more than if a company with a smaller market capitalization did the same.

Market capitalization, also just called the market cap, is calculated by multiplying the number of outstanding shares a company has on the public market by the price of a current share, and is used to measure a stock's overall market value.

The S&P 500 stock index tracks the price of stocks of companies with a market cap of at least $14.6 billion as of March 2022. There's a wide range of companies, from Warren Buffett's conglomerate Berkshire Hathaway, to bank stocks like JPMorgan to pharmaceutical companies like Johnson & Johnson and semiconductor businesses like Nvidia. The index also includes the names of tech giants you'll recognize, like Amazon, Apple, Microsoft, Tesla and Google's parent company Alphabet.

The S&P 500 is commonly used as a benchmark to measure the U.S. stock market performance overall. If you hear an expert say or read an article that references how stocks are doing, there's a good chance that person is actually referring to how the S&P index is doing.

The Dow Jones Industrial Average, which is made up of 30 stocks, and the Nasdaq 100 Index, which is made up of 100 stocks, are also common benchmarks. But the S&P is seen as a more full picture of the stock market because it includes stocks from such a wide variety of industries.

How to invest in S&P 500

Online stock trading platforms have made investing in stocks, bonds and funds like the S&P 500 easy and quick — with just a few clicks on your phone you can buy shares of the S&P 500 in seconds.

But there are different types of investments you can use to buy this stock market index, and various platforms to use.

Different ways to invest in S&P 500

The S&P 500 index is popular among both institutional and individual investors. But which types of investments are best?

There are pros and cons to buying the S&P 500 via exchange-traded funds (ETFs) or another type of index fund. Here's what you need to know.

ETFs

An exchange-traded fund (or ETF) is a basket of securities, like stocks or bonds, that can be traded like a stock throughout the day. That means that, unlike a mutual fund which has a price set once a day, the price of an ETF can change throughout the trading day.

ETFs can consist of hundreds or even thousands of stocks. They typically aim to deliver returns that match the overall market or a certain part of it, like small-cap or real estate stocks. They tend to have low fees compared to mutual funds, especially if they're passively managed, meaning that there isn't a Wall Street professional selecting which assets are added to and removed from the fund.

An S&P 500 ETF tracks the performance of the index and allows investors to buy shares of the overall index, which is a good way to diversify a portfolio.

S&P 500 ETF pros and cons

Pros
  • Tend to be low-cost compared to mutual funds
  • Can help diversify a portfolio
  • Commission-free trades through most brokerages
Cons
  • Lack of control over holdings as you can't sell in or out of particular companies
  • Some expense ratios are higher than others

Overall, S&P 500 ETFs are a good option for investors who want to diversify their stock portfolio and invest in 500 of the largest U.S. companies without having to buy individual stocks. They're also good for investors who want flexibility to be able to buy or sell their fund at any point throughout the day. Beginners to the stock market may find this to be an easy way to invest in many companies at once.

Index funds

An index fund tracks a group of securities, like stocks, bonds or commodities. Of the many types of investments out there, these are good options for investors who don't want to select individual companies to buy stocks in.

A S&P 500 index fund passively tracks the S&P 500 and allows investors to buy shares of the total basket of stocks.

S&P 500 index fund pros and cons

Pros
  • Tend to have low fees because they are passively managed
  • Can help diversify a portfolio
  • Commission-free trades through most brokerages
Cons
  • Lack of control over holdings as you can't sell in or out of particular companies
  • Some expense ratios are higher than others

Like S&P 500 ETFs, index funds that track the S&P 500 are a good option for investors looking to diversify their portfolios at a low cost.

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How to buy index funds

Follow these steps to buy index funds.

Open an account

You can now invest in the S&P 500 easily online, including via popular brokerages like Fidelity and newer trading apps like Robinhood. Investment accounts may be geared specifically toward retirement, like an individual retirement account (IRA) or a taxable brokerage account to to invest towards other goals, like a down payment.

Another option are robo-advisors, which will automatically rebalance your money for you. If you're buying a mutual fund, you can also buy it directly from the firm, like Vanguard, though this method is not as common. The fee structure for when you buy the index fund will vary based on the platform that you use, but no-fee trading has become more popular and is now the norm among online trading platforms.

Choose an index

If you're reading this, you're likely looking to buy an S&P 500 index fund. Keep in mind that the S&P 500 only consists of 500 large-cap stocks, so you'll want to make sure you have stocks of mid- and small-cap companies, as well as other types of assets like bonds, elsewhere in your portfolio.

Choose between a traditional index fund or an ETF

With traditional index funds, or mutual funds, you can only buy or sell the index once a day, at its price when the market closes at 4 p.m. E.T. ETFs, on the other hand, can be bought or sold at any point throughout the trading day — though experts recommend not trying to time the market.

While traditional mutual funds tend to have minimum investments, an ETF's minimum is simply the cost of a single share (or a part of a share, if you're buying fractional shares). For example, the Vanguard 500 Index Fund Admiral has a minimum investment of $3,000, but the Vanguard S&P 500 ETF can be bought with the price of just one share.

How to buy ETFs

Follow these steps to buy ETFs.

Open an account.

Like with other index funds, you can buy ETFs via many online platforms through a taxable brokerage account or an account with a specific focus, like an IRA for retirement, and trade ETFs as you would stocks. You can also invest in ETFs via a robo-advisor.

Choose an ETF.

There are many ETFs that track the S&P 500 to choose from, like the SPDR S&P 500 ETF Trust and the iShares Core S&P 500 ETF. If you know which ETFs you want to buy, you can simply search for the ticker symbol. But you can also use most trading platforms to look up important information like the expense ratio, which is a fee you'll have to pay, and the index's past performance.

Buy the ETF.

You can buy a single share of a S&P 500 ETF or multiple shares. When buying ETFs you can either choose a market order, which means you'll purchase the fund at its current price, or a limit order, which lets you set a price the trade will be executed at (if the fund hits that price).

Investing in S&P 500 FAQ
What companies are in the S&P 500?
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There are 500 large-cap U.S. stocks in the S&P 500. The index covers a broad range of sectors, including consumer staples, financials, technology and health care.

Many of the companies you interact with on an everyday basis are in the S&P 500, like Home Depot, Exxon Mobil, Mastercard and Coca-Cola. Some companies have more than one type of stock offered and included in the index, which is why you may see the designations "Class A" and "Class B."

How is the value of the S&P 500 calculated?
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The S&P 500 is market-capitalization-weighted index, which means the stocks that have a higher market capitalization will be weighted higher in the index. If a company in the index with a high market capitalization starts performing especially well or poorly, the change will impact the index more than if a company with a smaller market capitalization soars or tumbles.

This means that the value of the S&P 500 is always changing, depending on how the stocks included are doing throughout the day. The average annual returns of the index vary, but the annualized total return is around 10% since the index's inception, according to the S&P Dow Jones Indices.

What is the dividend yield of the S&P 500?
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As of May, 2022, the S&P 500 pays a dividend yield of around 1.54%, according to a S&P Dow Jones Indices factsheet.
Should you buy individual company stocks to invest in the S&P 500?
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The point of index-based investing is that you don't have to do the work to find individual stocks. Instead, you can invest in the broad market through the S&P 500, either via a mutual fund or ETF, which is a basket of securities. Instead of buying technology, energy and financial stocks and more individually, you can get them all at once via the index.

Keep in mind that the S&P 500 shouldn't make up your whole portfolio. It's important to have diversification in your stock portfolio, and that includes small-and mid-cap and international stocks as well. And if you're in need of investment advice, you can always seek out a financial advisor for help.

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Summary of Money’s Guide on How to Invest in S&P 500

  • Decide if investing in the S&P 500 makes sense for your investment strategy. If you're looking for a low-cost way to invest in a wide range of large-cap, U.S. stocks, it likely makes sense.
  • Open an investing account if you don't already have one. Popular investing platforms like Fidelity and Robinhood will allow you to buy shares of an S&P 500 fund in a traditional taxable brokerage account or an account for a specific goal, like a retirement account.
  • Choose which type of fund you want to invest in. There are different types of index funds to choose from, like ETFs.
  • Pick the specific fund you'd like to buy. Popular funds include the Vanguard 500 Index Fund Admiral and the SPDR S&P 500 ETF Trust.
  • Buy a single share or multiple shares of the fund via your investing account. Make sure that your portfolio is still diversified and includes small- and mid-cap stocks, international stocks and bonds, and that your asset allocation matches your financial situation, goals and risk tolerance.

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