If you’re looking for a reliable and popular way to invest in the US stock market, the S&P 500 index should definitely be on your radar.
As the most widely followed benchmark for the stock market, it gives investors a great snapshot of how large corporations are performing and how the stock market as a whole is faring.
So if you’re ready to start investing in the S&P 500, this article will provide you with everything you need to know. We’ll cover how the index works, what you need to do to invest in it, and why it might be a smart move for your portfolio. Let’s get started!
Table of Contents
What is the S&P 500 index?
The S&P 500 is a fancy name for a list of 500 large and influential companies in the United States. It’s like a snapshot of the health of the stock market, but based on the performance of these top dogs. You might hear people refer to the S&P 500 as a benchmark or an indicator of how the economy is doing.
It’s important to note that the companies in the index aren’t necessarily the biggest in the country, but they are major players in their industries. They represent around 80% of the total value of the U.S. stock market, so they carry a lot of weight.
The S&P 500 uses something called market capitalization to determine each company’s influence on the index. This is just a fancy way of saying the total value of all their shares on the market, based on the current market price. The bigger the company, the more impact it has on the index.
Just remember, you can’t buy the S&P 500 directly. It’s just a way of measuring how these 500 companies are doing in the stock market. But if you’re curious about how the biggest players in the American economy are performing, the S&P 500 is definitely worth keeping an eye on.
What companies are included in the S&P 500?
The S&P 500 is a stock market index that tracks the performance of 500 of the largest publicly-traded companies in the United States. These companies are selected based on market capitalization, liquidity, and other factors. As of March 31, 2023, the S&P 500 includes some of the biggest names in tech, healthcare, and finance.
Top 10 Companies in the S&P 500
The top 10 constituents of the S&P 500 by index weight as of March 31, 2023, are as follows:
- Apple (AAPL)
- Microsoft (MSFT)
- Amazon (AMZN)
- NVIDIA (NVDA)
- Alphabet Class A (GOOGL)
- Tesla (TSLA)
- Berkshire Hathaway Class B (BRK.B)
- Alphabet Class B (GOOG)
- Meta Class A (META)
- Exxon Mobil (XOM)
Sectors in the S&P 500
The companies in the S&P 500 are mostly concentrated in three sectors: information technology, healthcare, and financials. Information technology is the largest sector by weight in the S&P 500 index, at 26.1%. Healthcare is the second-largest by weight, at 14.2%, and financials are the third-largest at 12.9%. Together, these three sectors account for more than 50% of the S&P 500, reflecting the dominance of technology in the U.S. economy.
Other sectors in the S&P 500 include consumer discretionary (10.1%) and industrials (8.7%). The top five sectors together make up almost 75% of the S&P 500, while the remaining six sectors—communication services, consumer staples, energy, utilities, materials, and real estate—combined make up the rest.
How to invest in the S&P 500
If you want to invest in the S&P 500, here are four simple steps you can follow:
Step 1: Open a Brokerage Account
First, you’ll need to open a brokerage account that allows you to invest in the S&P 500. You can choose from various types of investment accounts, including individual retirement accounts (IRAs) and taxable brokerage accounts. Some account types offer tax benefits, so it may be worth considering what works best for you. You can check out our guide on how to open a brokerage account.
Step 2: Determine Your Investment Amount and Fund Your Account
Decide how much you want to invest in the S&P 500. Your investment goals and risk tolerance will play a role in determining your investment amount. Once you have decided, fund your account.
Step 3: Choose Between Individual Stocks or Index Funds
There are two main ways to invest in the S&P 500: buying stocks of individual companies or investing in index funds or exchange-traded funds (ETFs) that replicate the index. Investing in a fund can diversify your portfolio and be less risky. Some of the top-performing S&P 500 index funds include Vanguard 500 Index Fund, Fidelity 500 Index Fund, and Schwab S&P 500 Index Fund.
- Learn more: How to Invest in Index Funds
Step 4: Purchase Your S&P 500 Investments
Once you have decided on your investments, follow the instructions in your brokerage account to purchase. Stocks are purchased at the share price, while funds may have minimum investment requirements and fees like expense ratios.
How much does it cost to invest in the S&P 500?
If you’re considering investing in the S&P 500, it’s important to understand the costs involved. Here’s what you need to know before you make your investment.
Investing in an S&P 500 Index Fund
If you choose to invest in an S&P 500 index fund, you’ll need to consider the fund’s minimum purchase requirement. Some funds require a minimum investment, while others allow you to invest any dollar amount. Additionally, be aware of the fund’s expense ratio, which is an annual fee expressed as a percentage of your investment. For instance, if you invest $100, and your fund has an expense ratio of 0.04%, you’ll pay an annual fee of $0.04.
Investing in an S&P 500 ETF
ETFs, or exchange-traded funds, trade like stocks and have a share price. When investing in an S&P 500 ETF, you’ll need to pay the full share price, which can range from $340 to $380 per share for the major S&P 500 ETFs, depending on your broker. Alternatively, you may be able to purchase fractional shares for any dollar amount. As with index funds, it’s important to review the ETF’s expense ratio before investing.
Investing in Individual S&P 500 Stocks
If you choose to invest in individual stocks within the S&P 500 index, be aware that the share prices can vary significantly. Some stocks cost less than $100 per share, while others cost nearly $400 per share. Make sure you review each stock’s share price before making any investment decisions.
S&P 500 vs. Dow Jones Industrial Average
The Dow Jones Industrial Average is based on the stock prices of 30 large, publicly traded companies. It’s a price-weighted index, which means that the companies with higher stock prices have a greater influence on the index, regardless of their market capitalization. This can sometimes lead to misleading readings of the market, as the Dow doesn’t necessarily reflect the overall performance of the broader stock market.
On the other hand, the S&P 500 tracks the performance of 500 large-cap companies that are traded on the U.S. stock exchanges. Unlike the Dow, the S&P 500 is a market-cap-weighted index, which means that companies with larger market capitalizations have a greater influence on the index. This provides a more accurate reflection of the overall market performance.
Another key difference between the two indexes is their composition. The Dow excludes some of the largest stocks in the market, such as Amazon, Alphabet, and Berkshire Hathaway. In contrast, the S&P 500 is a more comprehensive index that includes a broader range of companies.
All in all, while the Dow Jones has its merits, the S&P 500 is generally considered to be a more reliable stock market indicator. So if you’re looking to gauge the performance of the stock market as a whole, the S&P 500 is a good place to start.
S&P 500 vs. the Nasdaq
The Nasdaq Composite Index is composed of stocks listed exclusively on the Nasdaq market. On the other hand, the S&P 500 consists of a mix of stocks from both Nasdaq and the New York Stock Exchange (NYSE). If you take a look at the top-10 list, you’ll see a mix of companies from both markets.
You may have also noticed that the Nasdaq Composite has a higher proportion of technology stocks than the S&P 500. That’s why it’s sometimes called a “tech-heavy” index. This means that when tech stocks are not performing well, the Nasdaq Composite tends to underperform the S&P 500 as well.
Another difference is that the S&P 500 is made up of large-cap stocks, which are typically companies with a market capitalization of over $10 billion. The Nasdaq Composite, on the other hand, includes all qualified stocks listed on the Nasdaq exchange. This makes it a more diverse index in terms of the market caps represented.
S&P 500 vs. the Russell Indexes
The Russell Indexes are a group of stock market indexes that provide benchmarks for the entire stock market. The Russell 1000 is the closest comparison to the S&P 500. It’s a large-cap stock index that consists of 1,000 stocks – twice as many as the S&P 500. The Russell 1000 is representative of 93% of the stock market. So, if you’re looking for a broader view of the market, the Russell 1000 may be a good choice.
In addition to the Russell 1000, there’s also the Russell 2000 index. This index is considered to be the best benchmark of how small-cap U.S. stocks are doing. Collectively, the Russell 1000 and Russell 2000 are known as the Russell 3000, which is a broad stock market benchmark index.
On the other hand, the S&P 500 is a market capitalization-weighted index of 500 large-cap stocks in the United States. It’s considered to be a good indicator of the overall health of the U.S. stock market. The S&P 500 is also one of the most widely used benchmarks for U.S. stock market performance.
So, which one is right for you? It depends on what you’re looking for. If you want a broader view of the stock market, the Russell 1000 or Russell 3000 may be a good choice. If you’re looking for an indicator of large-cap U.S. stock performance, the S&P 500 may be a better option. Either way, both the Russell Indexes and the S&P 500 can be useful tools for investors.
Should you invest in the S&P 500 Index?
Investing in the stock market can be intimidating, but it doesn’t have to be. One popular option for investors is the S&P 500 index. This index is made up of 500 of the largest publicly traded companies in the U.S., and it has a proven track record of delivering solid returns over the long term.
Warren Buffett, a highly successful investor, has even said that investing in a low-cost S&P 500 index fund is a great choice for most people. This is because the index has historically delivered annualized gains of 9% to 10%, and you can invest in it easily and inexpensively.
Of course, if you have the time and knowledge to research individual stocks and create a diverse portfolio, you might be able to outperform the S&P 500 over the long term. But not everyone has that kind of expertise or discipline, especially new investors. In that case, buying shares in an S&P 500 index fund can be a smart choice to build up your knowledge and experience.
Investing in the S&P 500 gives you broad exposure to the performance of many U.S. businesses, without relying too heavily on any one company. Over time, this can produce solid returns for your portfolio with minimal effort on your part. So if you’re looking for a simple and effective way to invest in the stock market, the S&P 500 index fund is definitely worth considering.
