How To Invest in The S&P 500

Investing in the S&P 500 for Beginners

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When you invest in the S&P 500, you purchase a fund that tracks the S&P 500 index. The S&P 500 index is a basket of 500 of the largest companies in the U.S. and makes up over 83% of the total US economic market capitalization.

If you’re an investor seeking quick diversification and predictable returns, you can begin investing in the S&P 500 in a few easy steps. First, you need to understand what you’re buying, open an account, pick a fund, and then make your first purchase. Lastly, it’s essential to regularly monitor your portfolio for vital signs that may affect your future investment decisions.

How To Invest in the S&P 500 in Six Steps

  • Understand what the S&P 500 is and what investments it is comprised of
  • Consider the pros and cons of purchasing an S&P 500 index fund and determine whether it fits your investment objectives
  • Open an investment account with a reputable investment company or brokerage
  • Choose which fund you wish to purchase
  • Make your first investment transaction
  • Regularly monitor and manage your portfolio after being invested

What You Need To Know Before You Invest in the S&P 500

There are a few things you should know before investing in any fund that tracks the S&P 500. First and foremost, you should know what the S&P 500 is and what it’s not, what it’s composed of, and understand potential risks associated.

A market index tracks the performance of a basket of stocks that represent a particular market or sector. 

The S&P 500 is a popular stock market index that measures the stock prices of 500 of the largest, publicly-traded companies in the United States. 

It's probably near impossible to recreate the entire index by investing in all the stocks individually, using the same weights. But there is a simpler way to get exposure to the S&P 500.

Investment companies like Vanguard create mutual funds and exchange-traded funds (ETFs) that track the S&P 500 index. Investing in one of these funds is equivalent to investing in the S&P 500 index.

Investors of all skill levels and experience levels invest in the S&P 500 for many reasons, including:

  • Diversification: Purchasing a fund that tracks the S&P 500 automatically diversifies your money amongst 500 of the largest publicly-traded companies in the US.
  • Passive Investing: Those who wish to be “passive investors” can do so by putting their money in index funds like the S&P 500.
  • Predictable Results: The earliest iteration of the S&P 500 has been around since 1923. As of Sept. 30, 2021, the 10-year annualized return for the index has been 16.63%.

Past performance does not guarantee an annual return of 16% going forward. It means that for long-term investors, you can expect decent average returns over the long run with the expectation of having smaller returns some years.

Understand the Risks of Investing in the S&P 500

Investors should always be aware of common risks before investing in the S&P 500 index. Some include market risk, investment style risk, management risk, tracking errors, and underperformance risks. 

  • Stock market risk: There are no guarantees when you invest in the stock market. Stock market risk refers to the chance that stock prices may decline, resulting in a potential loss.
  • Investment-style risk: The S&P 500 is composed of large-capitalization stocks. Investment style risk refers to the risk that returns from these large-cap stocks could be lower than the overall stock market returns.
  • Tracking errors: This risk refers to the index fund not tracking the investments in the underlying index perfectly. If an index is updated, the fund has to update as well to track the index correctly.
  • Underperformance: Any fees, expenses, trading costs, and tracking errors could result in the fund underperforming the actual performance of the index itself.

When you invest in the S&P 500 index, you’re not buying the index itself. Rather, you’re purchasing a fund that tracks the S&P 500 index.

Pros and Cons of Investing in the S&P 500

Pros
  • Well diversified among stocks

  • Dividends payouts

  • Little management required


Cons
  • Lack of asset or geographical diversification

  • Lack of flexibility

  • No exposure to small-cap stocks


Pros Explained

  • Well diversified among stocks: When buying an index fund that tracks the S&P 500, you are essentially splitting up your money amongst 500 of the largest companies in the US. Suffice it to say that you are well diversified amongst publicly traded companies in the US.
  • Dividend payouts: Many companies in the S&P 500 index pay dividends to their shareholders. As an investor in a fund that tracks the index, you will receive dividends relative to the amount invested.
  • Little management required: Investing in the S&P 500 index requires little management because the fund’s objective is to simply track the corresponding index. Thus, people who wish to be passive investors can put their money in the index fund and let it sit without much worry about actively managing their investments.

Cons Explained

  • Lack of investment diversification: While investing in the S&P 500 does give you diversification among equity investments in the U.S., it doesn’t diversify you among different types of investments, nor does it diversify you geographically because all the companies are listed in the US.
  • Lack of flexibility: Index funds such as this don’t have active fund managers that can react to market movements or economic events and make changes to the investments accordingly. 
  • No exposure to small-cap stocks: The S&P 500 requires that all included companies have at least an $11.8 billion market cap. This requirement means there is no exposure to small-cap stocks.

How To Start Investing In The S&P 500

Investing in the S&P 500 is much easier than you may think. First, you need a brokerage account, then you need to decide which fund you want to buy, and lastly, you need to make your first purchase of that fund! Here’s how it works.

Open an Account

You can open up an investment account with a modern investing app like Robinhood, or you can open an account with a traditional discount brokerage firm like Fidelity or TD Ameritrade. Here’s the info you will need in most cases to open up an investment account:

  • Contact Info: Your name, social security number (or tax ID), and contact information
  • Identification: A primary source of identification such as your driver’s license, passport, or government-issued ID
  • Employment: Your employment status and occupation, annual income, and approximate net worth
  • Objectives: Your investment objectives and risk tolerance (this is usually done through a quick questionnaire)

Decide Which S&P 500 Fund To Buy

There are mainly two different types of funds you can purchase that will track the S&P 500 index. They are exchange-traded funds (ETFs) and mutual funds. So first you need to decide which type of fund you wish to buy.

An ETF is a basket of companies pooled into one fund, and shares trade daily amongst individual investors, like buying and selling individual stocks. A mutual fund is a basket of investments managed either actively or passively by an investment company. Investors purchase shares of mutual funds directly from the company rather than individual investors.

After deciding whether you will buy an ETF or a mutual fund, you need to choose which company to buy the fund from. There are hundreds of companies that offer S&P 500 index funds. Below is a list of companies that offer both ETFs and mutual funds with strong reputations:

Company S&P 500 ETF Ticker Symbol S&P 500 Mutual Fund Ticker Symbol
Vanguard VOO VFIAX
Fidelity - FXIAX
iShares IVV -
SPDR SPY -
Schwab - SWPPX

Make Your First Transaction

After you’ve opened your investment account and chosen which S&P 500 index fund or ETF you want to buy, the last step is purchasing shares of the fund. To do this, simply look up the fund you wish to buy using the ticker symbol (like those in the graph above) or the fund’s name. Then, enter the amount you want to purchase. Depending on where you opened up your investment account, you will have the option to enter the number of shares to buy or enter a specified dollar amount you wish to invest (also known as investing with fractional shares). 

What To Watch Out for After You Invest in the S&P 500

After investing in an index fund that tracks the S&P 500, it’s essential to understand that patience is your best friend. Having too high expectations in regards to your expected returns can cause you to sell your shares too quickly, resulting in a net loss or a smaller overall gain.

If you sell your shares for a profit, you will be liable to pay capital gains taxes which are taxed at different rates depending on whether it was a long-term capital gain or a short-term capital gain.

Keep in mind that the U.S. stock market has always recovered from any economic downturns to surpass its previous highs reaching new market records. With that said, investing in the S&P 500 is not a set it and forget it approach. While it may be a more passive way of investing by nature, it’s still important to keep an eye on your investments to make strategic decisions based on your investment objectives.

Should I Invest in the S&P 500?

Investors of all experience levels purchase funds that track the S&P 500 as great additions to their portfolios. Whether you should invest in the S&P 500 or not is entirely dependent on your overall investment objective. Are you a passive investor or an active investor? What is your risk tolerance? How long will your money be invested before you need it? These are questions that will help you decide whether investing in the S&P 500 is right for you. Be sure to consult with a financial professional to make the best decision for your money.

Frequently Asked Questions (FAQs)

How can beginners invest in the S&P 500?

First, you need to open an investment account. If you’re unsure where to open an account, take a look at our top-rated investment apps. Next, choose a fund such as those mentioned in the article above. Then, simply set aside an amount of money that fits your budget to make your first purchase.

Do I need a lot of money to invest in the S&P 500?

In most cases, no. If your broker allows fractional shares investing, you can invest in an S&P 500 index fund with as little as a dollar. However, some brokerages only allow investing in whole shares and may have additional minimum investment requirements. For example, investing in most Vanguard index funds, including the S&P 500 index fund, requires a $3,000 minimum. ETFs, typically, are cheaper to buy.

What is the best way to invest in the S&P 500?

The best way to invest in the S&P 500 is to purchase an exchange-traded fund or a mutual fund that tracks the S&P 500 index. Buying a mutual fund or an ETF can be done with any brokerage account and, in most cases, with no minimum investment requirements.