If you’re trying to buy S&P 500 stock, the first thing to understand is that it technically doesn't exist: The S&P 500 isn't a stock, but a stock market index made up of about 500 publicly traded companies.
Among many long-term investors, buying into the S&P 500 is considered one of the most prudent ways to get into the stock market — and the most promising. The market index has posted historical average annual returns of around 10% before adjusting for inflation (though, as always, past performance never guarantees future success).
The companies in the S&P 500 meet specific criteria, mostly based on market capitalization, which measures the value of a company. The combined stock market performance of these companies makes up the performance of the S&P 500. This is a general definition, but you can learn more about how the S&P 500 works here.
If you want to invest in the S&P 500, you have two main options: Buy individual stocks in each of those companies, or buy an S&P 500 index fund or exchange-traded fund, also called an ETF. Here’s a bit more about these options.
Buy S&P 500 stocks directly
In theory, you could buy all 500-ish stocks that make up the S&P 500, considering the list is readily available to the public. In practice? Not so much. That’s generally far too many stocks for an average investor to individually purchase and manage.
What’s more, the index is market cap-weighted, meaning companies with large market caps make up a larger portion of the index. For context, the top 10 largest companies in the S&P 500 currently contribute to about 28% of the index’s performance. You would have to do a lot of math to determine how much of each stock you’d need to buy to mirror the market cap-weighted structure and returns of the S&P 500.
However, if you’re looking to add a few individual stocks to your portfolio, the S&P 500 is one place to start your search. These large-cap companies are typically considered more stable than smaller companies, and many pay dividends that can be used as income or reinvested to promote higher future gains. If you’re not sure how to tell if a stock is currently listed in the S&P 500, you can use a stock screener to filter for only those listed in the index. There are several free stock screeners available online if your broker doesn't offer one.
» Read to get started? Learn how to buy stocks
Buy an S&P 500 index fund
Rather than investing individually in every company in the S&P 500, you can purchase a single investment in an S&P 500 index fund, which distributes the amount you invest across all the companies in the index.
These index funds are weighted to mirror the S&P 500, so more of your investment is directed toward the largest companies, less of it toward the smallest companies. The end goal is to offer investors the same returns as the S&P 500. Remember that 10% average annual return figure from above? Given a long enough timeline — say five years or more — that’s in the ballpark of what these index funds will aim to return, too.
Some of the most popular S&P 500 index funds are structured as ETFs. Index funds and ETFs are similar, but ETFs can be bought and sold throughout the day, much like stocks. Index funds, on the other hand, can only be bought and sold at a price determined at the end of each trading day.
» Explore the differences: ETFs vs index funds
ETFs often come with very low management fees, known as expense ratios. In many cases, these fees are less than 0.1% of your total investment account balance paid once per year. This makes them a common choice for long-term investors hoping to keep investment costs to a minimum. (Note: ETF and index fund expense ratios do vary, so if it’s low costs you’re after, be sure to check a fund’s expense ratio before you invest.)
For many, a single S&P 500 ETF offers a low-cost way to gain exposure to some of the strongest, most reputable companies in the country. And this, generally, will be the most common way to invest in the S&P 500 — not by buying individual S&P 500 stocks.
» Check out: the best ETFs
S&P 500 stock returns
You can get a good idea of what kind of returns S&P 500 ETFs have generated in the past by looking at the S&P 500 itself. Here’s how the S&P 500 has performed historically since 1990, as well as how it’s performed more recently, and what it’s doing today. It’s always important to remember, however, that past performance in no way guarantees future results.
» Interested? Learn more about investing in index funds
