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How To Invest in the S&P 500: Everything You Need To Know

November 14, 2023

10 min Read

Written by Daria Uhlig

Edited by Melanie Grafil

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If you know anything at all about the stock market, then you’re probably familiar with the S&P 500. It’s considered by many financial experts to be the best barometer of the overall stock market’s performance, as well as a key indicator of how large corporations are performing financially.

Keep reading to learn what you need to know about how to invest in the S&P 500.

See: 3 Things You Must Do When Your Savings Reach $50,000

What Is the S&P 500?

The S&P 500, also known as the Standard & Poor’s 500 or S&P, is a stock index that includes some of the biggest and best-known companies in the United States. Because it is made up of large corporations across multiple industries, it is often used as a proxy for the overall stock market. Founded in 1957, the current S&P 500 actually includes a few more than 500 stocks because some companies issue more than one class of shares.

The S&P 500 is weighted by market capitalization, meaning that a specific company’s valuation determines its influence over the index’s performance. In this regard, you shouldn’t look at each company as representing 1/500^th of the index. Instead, huge companies like Apple and Microsoft will carry a lot more weight than smaller companies such as Whirlpool and American Airlines.

Ways To Invest in the S&P 500

Because the S&P 500 is a stock market index instead of an individual stock, you can’t invest in it directly. But there are passive investment options that track the S&P 500s performance and one non-passive way to get exposure.

Exchange-traded funds
Index funds
Individual stocks

Invest in an Exchange-Traded Fund

An ETF is a basket of stocks that are bundled together to create a single fund that can then be broken up into shares and sold to individual investors. It gives investors an easy way to invest in the S&P 500 without having to break the bank by buying a bunch of individual stocks.

The SPDR S&P 500 ETF, for example, recently priced at about $440 a share, and the fund carefully balances stock purchases to ensure that it matches the S&P 500. Keep in mind that the company that manages the ETF charges an expense ratio, which is essentially a small management fee. For the SPDR S&P 500 ETF, the expense ratio is 0.094%.

Pros

ETFs can be traded throughout the day, just like a stock.
You have no capital gains tax liability until you sell your shares.
Share prices can be budget-friendly compared to mutual funds. SPDR Portfolio S&P 500 ETF shares, for example, were trading at under $52 on Nov. 13.

Cons

Trading prices can be higher or lower than share’s net asset value.
ETFs can be costlier than individuals stocks because of fees and spreads investors must pay.
ETFs may have less liquidity than other investments because some trade infrequently.

Good To Know

The SPDR S&P 500 ETF is a popular choice for investors, but it isn’t the only ETF that tracks the S&P 500. Others include the iShares Core S&P 500 ETF and the Vanguard S&P 500 ETF.

Invest in an S&P 500 Index Fund

Index funds are mutual funds that mimic the performance of a particular stock index. Index funds are similar to ETFs, but there are differences. As mentioned earlier, ETFs trade like stocks throughout the trading day, while mutual funds don’t price until the end of the day.

Index funds also differ in the way they can reinvest the dividends paid by the stocks they hold. ETFs accumulate cash over the course of the quarter and then make adjustments in fund holdings when the index updates, whereas index funds can simply reinvest immediately.

S&P 500 index funds might differ in the exact makeup of their portfolios. For example, the Vanguard S&P 500 Growth ETF emphasizes growth-oriented companies in the S&P 500, while the Invesco S&P 500 High Dividend Low Volatility ETF specializes in stocks that offer strong dividends.

Pros

Immediate dividend reinvestment compounds mutual funds’ growth.
Fund net asset values are updated each business day, usually after the U.S. exchanges close, so the NAV is likely to match the share price.
Mutual funds are highly liquid.

Cons

Investors incur capital gains tax liability whenever the fund managers trade fund holdings at a profit.
Fees reduce gains earned on your investment.
Many mutual funds require a high minimum investment, such as $1,000 or $3,000.

Invest in Individual S&P 500 Stocks

You might not be able to buy shares in every stock in the S&P 500 index, but if your main investing goal is to purchase high-quality, large-cap stocks, you can purchase shares in select companies included in the index. A number of websites maintain updated lists of which companies those are.

The best ones for you to select depends on how much you want to invest and your risk tolerance. You can purchase shares in just one company — perhaps one of the top holdings, which have the strongest influence on the index — or purchase shares in a few companies. Selecting companies that operate in different sectors will help to diversify your portfolio.

Pros

You can select exactly which companies to invest in.
Depending on the brokerage, you might be able to invest in fractional shares.
Your investment might generate higher returns compared to funds.

Cons

A single S&P 500 stock, or even a handful of them, doesn’t represent the index.
Less diversity means more risk.
Researching stocks can be time consuming.

How Should a Beginner Invest in the S&P 500?

The best way for beginner to invest is through a mutual fund or ETF, both of which are safer and easier than individual stocks. Mutual funds might be the better choice if you have enough money to meet minimum investment requirements of the fund you select because the dividend investments can compound the fund’s growth. If you’re more budget-conscious or have concerns about capital gains tax liability, select an ETF instead.

Pros and Cons of Investing in the S&P 500

Investing in the S&P 500 seems like a no-brainer. After all, it includes over 500 of the leading U.S. companies and covers 80% of total U.S. market capitalization. However, features of the index could make it an undesirable investment for some.

Pros of Investing in the S&P 500

These benefits make the S&P 500 an attractive investment opportunity.

Strong performance — the index gained an average of more than 10% on an annualized basis between 1980 and 2022 and 10.7% annualized since its inception in 1957, according to AES Financial Services.
The index represents the overall market because all sectors are represented, so if you have confidence in the markets, an S&P 500 index investment offers broad exposure.
The number of companies and the sectors they represent provide some diversity for your portfolio.

Cons of Investing in the S&P 500

S&P 500 investments have potential drawbacks you should consider before you invest.

Although the index contains many companies and sectors, it’s a large-cap fund of U.S. stocks, and six of the top 10 holdings are technology stocks. You might need small- and medium-cap and global stocks, as well as stocks in non-tech sectors, to round out your stock holdings.
Stocks are always risky, especially in the short term. For example, in the pandemic-induced crash of 2020, the S&P 500 lost 34% of its value, and it lost 57% during the global financial crisis that began in 2007, according to Statista. You should consider an investment in the S&P 500 to be a long-term investment.

Is It OK to Just Invest in the S&P 500?

If you need to choose just one investment for the time being, the S&P 500 is a good choice because it represents the market as a whole due to the large number of holdings and sectors represented. However, you won’t find small- or midsize companies in the index, nor will you see foreign stocks or assets other than stock. Consider using future investments to diversify your portfolio.

How Do I Invest in S&P 500 Stock?

Your first step before investing in the S&P 500 is to open an account with a brokerage firm such as E-Trade, Fidelity or Charles Schwab. Most brokerages have simple online platforms you can use to open and fund the account. If you have a 401(k) or IRA, the same site where you view and manage your account will likely include options for brokerage services.

Decide what type of account you want to use. For most people who want to trade individual stocks, the best choice is a self-directed trading account — you’ll likely be restricted to ETFs and mutual funds if you invest through 401(k) or IRA. However, if you plan to invest in index funds, you can use your existing retirement account or open an IRA instead of, or in addition to, a regular trading account.
Open the account. The brokerage site will have links and buttons for you to follow.
Fund your account. You’ll have to move money from another source, such as your checking account, into your brokerage account before you can start trading.
Select your investments. Your brokerage should provide plenty of educational content about selecting investments as well as research about specific stocks and funds.
Once you’ve selected which S&P 500 investment you want to purchase, log in to your account, search the investment, and click the button or link to place the order. Depending on the type of investment, you’ll enter either a number of shares or a dollar amount. Follow the instructions to complete your purchase.

Should I Invest $100 in the S&P 500 Every Month?

As long as you’re also investing in other assets to maintain a diverse mix, investing $100 per month could be a sound strategy. Regular investment results in dollar-cost averaging, meaning you’ll buy high some months and low in others. Over time, you’ll have purchased fewer shares at high prices and more shares at lower ones. That makes dollar-cost averaging an excellent way to manage the risk of investing in stocks.

Other Indexes To Consider

The S&P 500 is just one of many indexes you can invest in. Here are some others:

Dow Jones Industrial Average: The Dow Jones Industrial Average is the oldest continuous index in the U.S., according to Nasdaq. It’s comprised of 30 American blue-chip companies weighted by price.
Nasdaq-100: The Nasdaq-100 focuses on innovative companies with high growth potential. Technology stocks make up over 50% of its holdings.
Russell 3000: The Russell 3000 index includes America’s 3,000 largest companies. The index represents over 95% of the U.S. market, which means it’s more broad than the S&P 500. It’s the index on which the Russell 2000 and Russell 1000 are based.

The Bottom Line

One reason ETFs and index funds are good options for novice investors is that they both feature passive management, which means they simply track the performance of the index itself instead of trying to pick individual stock winners.

The consistently strong returns of the S&P 500 make an ETF or mutual fund tied to the index a comparatively safe and affordable investment option. For more risk-tolerance investors, investing in individual stocks of companies in the S&P 500 is an option that can produce higher returns, but it won’t track the index like index funds do.

Joel Anderson and Vance Cariaga contributed to the reporting for this article.

Information is accurate as of Nov. 13, 2023.

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