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How to invest in the S&P 500 Index
There are numerous ways to invest in this major stock index, and we’re here to guide you through the process, every step of the way.
Where can I buy into the S&P 500 Index?
What is the S&P 500 index?
It is the benchmark stock market index in the United States. It tracks the performance of 500 companies that are listed on various stock exchanges throughout the USA, and is heavily weighted toward five individual stocks: Microsoft, Apple, Google, Amazon, and Facebook. You can read lots more about the index on its dedicated page.
Is it a good investment?
The biggest advantage that investing in an index offers over an individual stock is diversification. With indexes, you are spreading your risk across 500 stocks instead of just one, making your investment less prone to volatile price swings.
But while investing in this major index is generally a safer investment, it has its flaws too, such as that index funds tend to fall across the board if a bear market sets in. Similarly, while you’re invested in multiple stocks – performance is mirrored when the United States makes certain decisions, or the US dollar falls.
Consider all risk and reward factors before buying any investment asset, including any investment product pegged to the S&P 500.
How do I invest in the S&P 500 index?
Now that we’ve run down some of the basics, it’s time to dig in with more information on the steps you need to take to invest in the index. Here are three key factors to consider before making your move:
- Choose an investment type
- Use our top tips to succeed
- Choose a platform to invest with
1. Choose an investment type
There are many different methods you can use to invest in this index. So, in the same way that you’d need to vet multiple banks before choosing where to open a savings account, you’ll want to review each investment option before making your selection. Here are your options:
An ETF (exchange-traded fund) is an investment fund traded on a stock exchange, much like a stock. ETFs can hold different assets, such as individual stocks, bonds, or commodities, or serve as a proxy for a stock index. With the benefit of asset diversification combined with low fees, an index ETF can be a good way to invest your money in this index but still retain the ability to trade your investment on an exchange. Still, an ETF can become volatile and dangerous during a bear market, when market indices fall sharply.
This method of investing is for you if you want to enjoy the diversification of the S&P 500, combined with low fees and the ability to trade your investment on an exchange. You can browse available ETFs here.
Another way to invest is to buy shares in all 500 of the stocks that the index tracks. This can be done using an online broker. On the plus side, going this way enables you to then decide which stocks you want to keep longer-term, and which ones you want to unload – something you can’t do if you invest in the index as a whole. The downside is that making 500 separate transactions to buy each stock will run up your transaction fees in a hurry and take up a lot more of your time.
This method of investing makes sense for you if you want to test-drive all 500 stocks, then be able to trim down your holdings to focus on a smaller number of top performers. The transaction fees associated with this strategy are large, so this is generally recommended for investors with larger investing budgets and time on their hands.
A mutual fund is a professionally managed investment fund that pools money from a wide array of investors to invest in different assets, in this case, the index as a whole. A fund offers the same type of advantage that the ETF does, in that you’re invested in all 500 stocks. However, unlike ETFs, mutual funds cannot be freely traded and must be bought through a stockbroker or directly from the fund.
One negative of mutual funds is that they charge higher fees than ETFs do. Also, while mutual funds defray risk through diversification, it also means you’ll be stuck holding both the best-and-worst performing stocks within the broader index. (A mutual fund is also commonly called an index fund).
A mutual fund makes the most sense for investors who want to buy and hold for a longer period of time since it cannot be traded in the same way as an ETF.
2. Use our top tips to be a successful investor
Before you invest, review these top tips.
- Do your research. Take the time to research the pros and cons of investing in this index, as well as the different methods you can use to invest. Having a plan ahead of time will improve your odds of success.
- Set a budget. Set a budget that suits your lifestyle and your tolerance for risk. You don’t want to get into a situation where you accrue losses so large that it wrecks both your confidence and your ability to make future trades.
- Select the right platform. We’ve already highlighted the different trading platforms you can use to invest in the index in the previous section. Consider all the options available and choose the one that works best for your investing needs.
- Grow your investments gradually. For beginners, it might make sense to invest a smaller amount of money to start. You can always invest bigger amounts as you gain more experience and expertise.
- Think long-term. Investing in index funds is often a long-term strategy, one that can be used to take advantage of months or even years of gains, as major index funds aim for consistent steady growth over time.
3. Choose a platform to invest with
Once you have decided how you want to invest, you need to find a service that will execute your trade. Here are some of the most popular options:
- Brokers & trading platforms. Brokers and trading platforms offer easy-to-use tools that enable you to invest. Online trading platforms offer low transaction fees, which is a big plus. On the other hand, they tend not to have a huge amount of investment advice, so if you’re looking for more tailored customer experience, you might want to look elsewhere.
- Robo advisors. Robo advisors rely on algorithms to execute trades, thus also offering the benefit of low transaction costs. Moreover, many robo-advisors will also allow you to discuss your investment strategy with a human advisor to help you make the right decisions. Still, this too is a more hands-off approach than investing through a licensed financial advisor.
- Financial advisors. Financial advisors offer the most hands-on approach to investing, walking you through the pluses and minuses of various different investment options, which can be a big help to novice investors. However, investing in any index is a simple investment approach, and as such might not warrant the expensive fees that financial advisors charge.
- Banks. You can invest in an index through your bank, which can give you the convenience of having all of your financial instruments (e.g. checking account, savings account, line of credit, and investments) with the same institution. The problem is that banks tend to charge very high fees, while still not offering the high level of advice that a good financial advisor can.
Ready? Here’s our top recommended broker
What should I do now?
If you’re ready to start investing, go to your chosen trading platform and you can get started right away. However, if you still don’t feel ready and wish to learn more about indices and stocks, check out more of our easy-to-navigate educational courses, right here on this site.
Try some of our investment courses for beginners
Still not feeling ready to start investing in this index? No problem. You can learn all the fundamentals you’ll need to get started with Invezz.com.