What the S&P 500 is and why people invest in it

The S&P 500 is a list of 500 large U.S. companies — Apple, Microsoft, Coca-Cola, and others — ranked by market value. When you invest in the S&P 500, you own a small piece of all 500 companies at once, not just one. Most people do not buy individual shares of each company. Instead, they buy into a fund that holds all 500 for them.

People invest in the S&P 500 because the 500 largest companies tend to grow over time, and owning them means your money grows too. You are betting on the U.S. economy as a whole, not on whether one company will succeed or fail. The S&P 500 has historically returned about 10% per year on average over long periods, though some years are much higher and some are lower or negative.

The main reason to choose the S&P 500 over picking individual stocks is simplicity and lower risk. You do not have to research which companies are good investments. You own the 500 largest ones automatically, and if one fails, the other 499 cushion the blow.

Key Takeaways

  • You invest in the S&P 500 through a fund — either an index fund or an exchange-traded fund (ETF) — not by buying individual company shares.
  • Index funds and ETFs that track the S&P 500 charge low fees, usually between 0.03% and 0.20% per year, which means more of your money stays invested.
  • You can open an account at a brokerage firm like Fidelity, Vanguard, or Charles Schwab, deposit money, and buy S&P 500 funds in minutes.
  • The S&P 500 is a long-term investment — most people hold it for years or decades, not days or weeks.
  • You can invest through a regular taxable account, a retirement account like a 401(k) or IRA, or both.

Index funds versus exchange-traded funds: which route to take

Both index funds and ETFs let you own all 500 companies with one purchase. The difference is how they trade and how you buy them.

An index fund is a mutual fund that holds the 500 stocks and tracks the S&P 500. You buy it directly from the fund company or through a brokerage. The price is set once per day, after the market closes. You can set up automatic monthly deposits, and the fund buys shares for you on a schedule. Index funds work well if you want to invest the same amount every month without thinking about it.

An exchange-traded fund (ETF) is similar but trades like a stock during market hours. The price changes throughout the day. You buy and sell it through a brokerage account, the same way you would buy a single stock. ETFs are more flexible if you want to time your purchases or sell quickly, but they require you to actively place trades.

For most people starting out, an index fund is simpler because you can set it and forget it. The fees are nearly identical — both charge roughly 0.03% to 0.20% per year — so cost is not the deciding factor. Pick whichever feels easier to you.

Where to open an account and what you will need

You need a brokerage account to buy S&P 500 funds. A brokerage is a company that holds your money and lets you buy and sell investments. The largest and most beginner-friendly are Fidelity, Vanguard, Charles Schwab, and E-Trade, but many others exist.

To open an account, you will need a Social Security number, a valid ID, your current address, and a bank account to deposit money from. The process takes 10 to 15 minutes online. Most brokerages let you open an account with no minimum deposit, though some require $500 or $1,000 to start. Once your account is open and you have deposited money, you can buy S&P 500 funds immediately.

Popular S&P 500 index funds and ETFs include the Vanguard S&P 500 ETF (ticker: VOO), the Fidelity S&P 500 Index Fund (ticker: FXAIX), and the Schwab U.S. Large-Cap ETF (ticker: SCHX). All three track the same 500 companies and charge very low fees. You can buy any of them through any brokerage.

How much money you need to start

You can start with as little as $1. Most brokerages have no minimum deposit requirement, and you can buy fractional shares — meaning if an S&P 500 ETF costs $400 per share, you can buy $50 worth and own one-eighth of a share.

The real question is not how much you need to start, but how much you can afford to invest regularly. Investing $50 per month for 30 years will grow substantially. Investing $1,000 once and never adding to it will grow much more slowly. Most financial advisors suggest investing what you can afford to lose in the short term, because stock prices go down sometimes and you may need years to recover.

If you have high-interest debt — credit card balances, for example — paying that down first usually makes more sense than investing, because the interest you pay on debt is usually higher than the returns you would earn in the S&P 500.

Retirement accounts versus regular accounts

You can invest in the S&P 500 through two types of accounts: a retirement account or a regular taxable account. The choice depends on your income and your timeline.

A 401(k) is a retirement account offered by your employer. You contribute money before taxes are taken out, which lowers your taxable income for the year. Your employer may match part of what you contribute — assistance programs. The money grows tax-free until you withdraw it after age 59½. If you have access to a 401(k) with an employer match, that is usually the best place to start because of the match.

An IRA (Individual Retirement Account) is a retirement account you open yourself, not through an employer. A Traditional IRA lets you deduct contributions from your taxes. A Roth IRA does not give you a tax deduction now, but withdrawals after age 59½ are tax-free. For 2024, you can contribute up to $7,000 per year to an IRA (or $8,000 if you are 50 or older). You can hold S&P 500 funds inside an IRA at any brokerage.

A regular taxable account has no contribution limits and no age restrictions on withdrawals. You pay taxes on dividends and gains each year. Use this if you have already maxed out your 401(k) and IRA, or if you need the money before age 59½.

What happens to your money over time

When you own S&P 500 funds, two things make your money grow: price increases and dividends. The 500 companies pay dividends — small cash payments to shareholders — usually once per quarter. Your fund reinvests those dividends automatically, buying more shares with the payout. Over decades, this compounding effect is powerful.

The S&P 500 does not go up every year. In some years it drops 10%, 20%, or more. In 2022, it fell about 18%. In 2023, it rose about 24%. This volatility is normal and expected. If you panic and sell during a down year, you lock in losses. If you hold through the down years, history shows you recover and go higher.

Most people who invest in the S&P 500 do not check their balance every day or every week. They check it once or twice a year, or not at all until they need the money. The longer you hold, the more time the market has to recover from downturns and the more your money compounds.

Frequently Asked Questions

Can I lose all my money investing in the S&P 500?

Theoretically, yes, but it would require all 500 of the largest U.S. companies to go bankrupt simultaneously, which has never happened. You can lose money in the short term — the S&P 500 has had negative years — but historically it has always recovered and reached new highs within a few years. If you cannot afford to lose money in the next 5 to 10 years, the S&P 500 may not be the right investment for you right now.

Should I try to time the market and buy when prices are low?

Most research shows that trying to time the market — buying when you think prices will go up and selling when you think they will go down — does not work for most people. Investing the same amount every month, regardless of price, historically outperforms trying to pick the perfect moment. This is called dollar-cost averaging.

What if I need the money before retirement?

You can withdraw from a regular taxable account anytime without penalty. You will owe taxes on gains, but there is no age restriction. If you withdraw from a 401(k) or Traditional IRA before age 59½, you usually pay a 10% penalty plus income taxes. A Roth IRA lets you withdraw contributions (not earnings) anytime tax-free, which makes it more flexible if you might need the money.

Do I need to pick individual stocks instead of an S&P 500 fund?

No. Most professional investors recommend the S&P 500 for beginners and long-term investors because it is simpler and has lower fees. Picking individual stocks requires research, time, and emotional discipline. Studies show that most people who pick individual stocks underperform the S&P 500 over time.

How often should I rebalance or change my investments?

If you are investing in only the S&P 500, you do not need to rebalance. The fund itself stays balanced automatically. If you own multiple types of investments — stocks, bonds, real estate — you may rebalance once per year to keep the mix you intended. For most people, rebalancing once a year or not at all is fine.