How to Invest in the S&P 500: A Beginner’s Guide

Investing
Updated: 14th Nov 2020
Written by Drew Cheneler
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How to Invest in the S&P 500: A Beginner’s Guide
Investing
November 14, 2020
Written by Drew Cheneler

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Whenever someone new to investing asks for advice, experienced investors will often reply with a single confusing statement: “Start investing in the S&P 500”.

But what is the S&P 500, and how do you invest in the S&P 500 for success? This beginner’s guide will break down all these questions and more.

What is the S&P 500 Index?

Let’s get some initial definitions out of the way first.

The S&P 500 is one of the largest and famous stock market indexes in the US. It’s an index that comprised of shares from the top 500 largest or industry-leading US-based companies.

Most stock market investors follow the S&P 500 since it acts as a kind of proxy or summary of the market’s overall health.

It was created by Standard & Poor’s, which is an American investment information service. The S&P 500 is updated every quarter when S&P’s investment committee meets and reviews which company stocks belong in the index.

Technically, 505 stocks are represented in the index at this time – a little more than the 500 in the name.

Note that companies in the S&P 500 are not necessarily the largest, but rather, are the most important for the broader market or economy.

The S&P 500 is “cap-weighted”. This means that every stock within the index is weighted or valued based on its market capitalization.

The larger a company is or the more influence it has, the more influence it also has on the S&P 500 index.

How to Start Investing in the S&P 500

Next Steps: How to Start Investing

S&P 500 Companies Ranking by Weight (Top 10 Holdings)

S&P 500 companies, as mentioned, are reviewed, and may change every quarter. As of the last quarterly review (in August 2020), the top 10 S&P 500 companies from most weight to least weight were:

  • Apple
  • Microsoft
  • Amazon
  • Facebook
  • Alphabet, the parent company of Google
  • Berkshire Hathaway
  • Johnson & Johnson
  • Visa
  • Procter & Gamble

Where to Invest in the S&P 500

So, you want to learn how to invest in the S&P 500 index?

First you need to determine how you’ll be doing your investing. There are multiple avenues or platforms you can use to begin investing in this valuable index. Here are our favorite ways to invest in the S&P 500.

Brokerage Account

First, you need to consider opening a brokerage account. A brokerage account is an account that has money on the stock market through owning shares or other financial assets.

Brokerage accounts can be actual stock market trading accounts or retirement accounts, like 401(k) programs or traditional IRAs.

Fortunately, there are tons of different brokerages to choose from. Fortunately, we compiled a list of the best online stock brokerages. It’s a good idea to check out fees for buying and selling ETFs and mutual funds, as this will affect your overall profits and operational costs.

You can also get brokerage accounts from investment firms. Popular examples include Etrade, TD Ameritrade, and Ally Invest.

Financial Advisor

Consider hiring a financial advisor. These professionals can help you invest in the S&P 500 wisely and for long-term profits.

However, financial advisors are often costly and may take a percentage of any earnings that results from your investments. This is still a good choice if you don’t have a lot of stock market investment experience.

Robo Advisor

A robo advisor is essentially the same thing as a financial advisor, except it’s automated and runs on algorithms.

The advice you will get won’t be nearly as detailed or in-depth, but these bots can still be of assistance if you don’t have investing experience to rely on. M1 Finance is a robo-advisor worth considering. They make it seamless for investors to invest in the S&P 500.

Discount Brokerage

A discount brokerage (also called a trading platform) essentially allows would-be stock market traders to take care of their own trading using their software interface.

These usually have really low fees, but they don’t have the same investment advice or support as a dedicated investment firm.

This is really only a solid choice if you have some investment experience already and know what to do when investing in the S&P 500.

Related: Best Investing Apps

Bank

Lastly, you can always try investing in the S&P 500 with your bank. This allows you to keep every account you have, including your checking and savings account alongside your investment account, in a single location.

However, banks often incur high fees, and you may not be able to get financial investment advice through a normal banking institution.

Basically, S&P 500 investing is a side concern for banks whereas it’s the primary purpose of investing firms.

How Do You Invest in the S&P 500?

Let’s break down the steps you should take to invest in the S&P 500.

#1. Open a Brokerage Account

First, open a brokerage account using one of the above methods. Add a financial or robo advisor to your portfolio as well if you have the extra cash and want the advice that those resources can bring.

#2. Decide Between an ETF, Index Fund, or Mutual Fund

Next, you’ll need to decide where you want to put your money on the S&P 500. There are three types of investment assets to choose from.

ETFs

ETFs or exchange-traded funds are really similar to traditional stocks, so they may be a good choice if you don’t have a lot of stock market experience. You can purchase ETFs quickly and easily, and prices change throughout the day. Lots of discount brokerage firms or trading platforms will let you trade any ETF assets for free.

Mutual Funds

A mutual fund is an asset that’s intended to be on for a long period of time. You can only trade mutual funds once per day after market close, and many of these have minimum investment amounts and lengths of time for investment. Mutual funds are good instruments for long-term financial gains.

Index Funds

S&P 500 Index funds are passively managed mutual funds that have slightly higher buy-in rates compared to ETFs.

Learn: Index Funds vs Mutual Funds

#3. Select Your Fund

Ultimately, mutual and index funds are better for long-term investments, while ETFs are slightly better for short-term gains. If you are unsure, then consult with a financial advisor for information about which you should choose to invest in.

Related: Motley Fool Stock Advisor Review

Popular Funds and ETFs to Consider

Here is a breakdown of some popular funds and ETFs you can usually find on the S&P 500.

Vanguard 500 Index Investor Share Class (VFINX)

This mutual fund is almost identical to the overall S&P 500 value, and it’s actively managed with a relatively high expense ratio.

The SDPR S&P 500 ETF (SPY)

This famous ETF is the oldest in the United States, and it’s also the largest. This makes it a common choice for casual stock market investors.

Fidelity 500 Index Fund (FXAIX)

This is an index fund with a relatively cheap expense ratio that’s also managed by Fidelity: a large investment firm with a good history of sound financial decisions.

iShares Core S&P 500 ETF (IVV)

This very cheap fund can be found promoted by lots of discount or online brokerages and is often recommended for beginner investors.

Vanguard S&P 500 ETF (VOO)

This is a stock index that focuses on most of the companies inside the S&P 500, making it a good “broad portfolio” investment choice.

Schwab S&P 500 Index Fund (SWPPX)

This is another fund that tracks the total return for the S&P 500 and invests at least 80% of its net assets into the stocks within.

Related: Stock Analysis Websites

#4. Place Your trade

After deciding which funds, you want to invest in, all you need to do is place your trade using your brokerage account or online trading platform.

Again, doing this with a little assistance from a financial or robo advisor isn’t a bad idea if you don’t have a lot of experience already.

Should You Invest in the S&P 500?

Absolutely. Millions of Americans invest in the S&P 500 over decades and end up getting fantastic returns.

For example, if you had invested just $10,000 in the S&P 500 around 1980, you’d have almost $750,000 by today.

Thus, it’s a great idea to invest in the S&P 500 as early as you can so that your returns compound upon one another.

However, keeping a diverse portfolio is crucial – while the S&P 500 will eventually always bounce back from any depression or recession, it’s easier to weather those storms with a diverse collection of investments and assets.

Downsides of Investing in the S&P 500

There are a few potential caveats to remember. For example, the S&P 500 is only comprised of large-cap US stocks, which means the above-mentioned portfolio diversification may be a little difficult.

Furthermore, the S&P 500 is trending toward overvaluation according to some data.

However, the S&P 500 is still a relatively solid investment area and is recommended for many.

Bottom Line: How to Invest in the S&P 500

All in all, you can invest in the S&P 500 by:

  • Opening a brokerage account of some kind
  • Choosing funds or ETFs to invest in
  • Placing your trades and allowing your wealth to grow

Investing wisely in the S&P 500 will allow you to enjoy long-term wealth growth for you and your family. Good luck!

More Resources:

Drew Cheneler
Drew Cheneler
Drew is a recognized Credit, Small Business, and Personal Finance Expert. He has been quoted in CNBC, Fox Business News Section, The Huffington Post, Business.com, Moneyunder30, US Chamber of Commerce, and more. He is known for breaking down complex personal finance topics into action-oriented advice, so you can make the most of your hard-earned money.