The S&P 500 is a collection of 500 large U.S. company stocks, and you can own a piece of it through a brokerage account or retirement plan

The S&P 500 tracks the 500 largest publicly traded companies in the United States — companies like Apple, Microsoft, Coca-Cola, and JPMorgan Chase. You do not buy the S&P 500 directly. Instead, you buy a fund that holds all 500 stocks inside it, so your money is spread across many companies at once. This spreading is called diversification, and it reduces the risk that any single company's failure will hurt your savings.

Most people invest in the S&P 500 through an index fund or exchange-traded fund (ETF) — both are baskets of stocks that track the S&P 500. You open an account at a brokerage (a company that lets you buy and sell investments), deposit money, and buy shares of the fund. The fund's value rises and falls with the overall market, and you can sell your shares whenever you want.

Key Takeaways

  • You buy S&P 500 funds through a brokerage account, which you can open online in minutes with as little as $1 to $100 to start.
  • Index funds and ETFs are the two most common ways to own the S&P 500, and both charge low annual fees that range from 0.03% to 0.20% depending on the fund.
  • Retirement accounts like a 401(k) or IRA often offer S&P 500 funds as an investment choice, and contributions to traditional IRAs and 401(k)s may reduce your taxes.
  • The S&P 500 has historically returned about 10% per year on average over long periods, but past performance does not mean future results will be the same.
  • You can invest a lump sum once or set up automatic monthly deposits, and you should plan to hold your investment for at least five to ten years.

Opening a brokerage account and choosing a platform

A brokerage is simply a company that holds your money and lets you buy and sell investments. Major brokerages include Fidelity, Vanguard, Charles Schwab, E-Trade, and Robinhood. Most charge no account fees and no commission when you buy or sell funds. You can open an account online in 10 to 15 minutes by providing your name, Social Security number, address, and bank information.

When choosing a brokerage, compare the S&P 500 funds they offer, the annual fees those funds charge, and whether the platform is easy for you to use. Vanguard's VOO and Fidelity's FXAIX are two of the lowest-cost index funds available, each charging about 0.03% per year. Schwab's SWTSX charges 0.03% as well. ETFs like SPY, IVV, and VOO trade like stocks but hold the same S&P 500 companies inside them. The difference between index funds and ETFs matters less than the annual fee — a lower fee saves you thousands over decades.

Index funds versus ETFs: which to choose

An index fund is a mutual fund that holds all 500 S&P 500 stocks and is priced once per day after the market closes. You can set up automatic monthly investments, and many brokerages let you buy fractional shares (a piece of a share) with any dollar amount. Index funds are simple and good for people who want to invest regularly without thinking about timing.

An ETF (exchange-traded fund) trades throughout the day like a stock, so its price changes every few seconds. You can buy and sell at any time during market hours. ETFs also hold all 500 stocks and charge similar annual fees to index funds. The main practical difference is that ETFs work better if you want to trade actively, while index funds work better if you plan to buy and hold for years.

For most people saving for retirement or long-term goals, either choice works. Pick whichever fund your brokerage offers with the lowest annual fee, and do not switch between them frequently. Switching costs money and disrupts your long-term plan.

Using a retirement account to invest in the S&P 500

A 401(k) is a retirement account offered by your employer. Most 401(k) plans include S&P 500 index funds as one of the investment choices. When you contribute to a traditional 401(k), the money comes out of your paycheck before taxes, which lowers your taxable income for the year. Your employer may also match a portion of your contribution — for example, matching 50% of what you contribute up to 6% of your salary. That match is assistance programs and a reason to contribute if your employer offers it.

An IRA (Individual Retirement Account) is a retirement account you open on your own, not through an employer. A traditional IRA lets you deduct contributions from your taxes in the year you make them, up to a limit set by the IRS (the limit changes yearly). A Roth IRA does not give you a tax deduction now, but withdrawals in retirement are tax-free. Both types let you invest in S&P 500 funds. For 2024, you can contribute up to $7,000 per year to an IRA if you are under 50, or $8,000 if you are 50 or older.

If your employer offers a 401(k), start there and contribute enough to get the full employer match. After that, open an IRA and fund it as much as you can. Both accounts let your money grow without being taxed on gains each year, which compounds your returns over time.

How much to invest and how often

There is no minimum amount to start. Many brokerages let you open an account with $0 and buy your first S&P 500 fund with $1. Some require $100 or $500 to open. Check the brokerage's website for their minimum.

You can invest in two ways: a lump sum (putting in a large amount all at once) or dollar-cost averaging (investing a fixed amount regularly, like $200 per month). Research shows that lump-sum investing performs slightly better on average, but dollar-cost averaging feels less risky psychologically and works better if you do not have a large amount saved yet. Most people benefit from setting up automatic monthly deposits and forgetting about them.

How much should you invest? Financial advisors often suggest saving 10% to 15% of your gross income for retirement, but start with whatever you can afford. Even $50 per month compounds into meaningful wealth over 20 or 30 years. The most important thing is to start and stay consistent.

Understanding fees and how they affect your returns

Every fund charges an annual fee called an expense ratio, expressed as a percentage of your investment. A 0.03% expense ratio on a $10,000 investment costs $3 per year. A 1% expense ratio on the same $10,000 costs $100 per year. Over 30 years, that difference compounds into tens of thousands of dollars.

S&P 500 index funds and ETFs are among the cheapest investments available, with expense ratios typically between 0.03% and 0.20%. Actively managed funds (where a manager picks stocks instead of tracking an index) often charge 0.5% to 1% or more. Stick with index funds or ETFs tracking the S&P 500 — the lower fees mean more of your money stays invested and working for you.

Some brokerages also charge trading commissions, account fees, or inactivity fees. Most major brokerages have eliminated these, but check before you open an account. A brokerage that charges $10 per trade can cost you hundreds per year if you invest monthly.

What to expect: returns, volatility, and time horizon

The S&P 500 has returned an average of about 10% per year over the past 90 years, but this average hides a lot of variation. Some years it rises 30%, other years it falls 20% or more. This up-and-down movement is called volatility. If you need your money in one or two years, the S&P 500 is risky because you might have to sell during a down year. If you can leave your money invested for at least five to ten years, volatility becomes less important because the long-term trend has historically been upward.

Past performance does not may provide future results. The 10% average return is historical data, not a promise. Economic conditions, interest rates, and company profits change over time. Plan conservatively and assume lower returns than the historical average when calculating how much you need to save for retirement.

Do not check your account balance constantly. Market swings are normal, and frequent checking often leads to panic selling at the worst time. Set up your automatic investments and review your account once or twice per year.

Frequently Asked Questions

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

Losing everything would require all 500 companies to fail simultaneously, which has never happened in U.S. history. You can lose money in the short term — the S&P 500 has fallen 30% to 50% in severe recessions — but it has always recovered and reached new highs. The longer you hold, the lower your risk of permanent loss.

What is the difference between VOO, FXAIX, and SPY?

VOO (Vanguard S&P 500 ETF) and FXAIX (Fidelity S&P 500 Index Fund) both track the S&P 500 and charge 0.03% annually. VOO is an ETF that trades like a stock; FXAIX is a mutual fund priced once daily. SPY is an older ETF that also tracks the S&P 500 but charges 0.09% annually. For most investors, VOO or FXAIX are better choices because of lower fees.

Should I invest in the S&P 500 or individual stocks?

The S&P 500 is simpler and less risky because your money is spread across 500 companies. Individual stocks require research and carry higher risk — one bad company can hurt you significantly. Most people, including professional investors, do better with index funds over decades. Individual stocks are a side activity, not a primary strategy.

Can I invest in the S&P 500 if I have debt?

Pay off high-interest debt (credit cards, personal loans) before investing. The interest you pay on debt usually exceeds the returns you earn from investing. After high-interest debt is gone, you can invest while paying off lower-interest debt like mortgages or student loans.

How do I know when to sell my S&P 500 investment?

If you are investing for retirement, you typically do not sell until retirement. If you are saving for a specific goal (a house down payment, a car), sell when you need the money. Avoid selling during market downturns — wait for recovery if possible. Selling and buying based on market timing usually costs money rather than making it.