What buying the S&P 500 actually means

You cannot buy "the S&P 500" as a single thing. The S&P 500 is a list of 500 large U.S. companies. When people say they are investing in the S&P 500, they mean buying a fund that holds all 500 of those stocks in one package. The fund does the work of owning each piece; you own a share of the fund.

There are two main types of funds that track the S&P 500: index funds and exchange-traded funds (ETFs). Both hold the same 500 stocks. The difference is how you buy them and how much they cost to own. Index funds are bought through a brokerage account and priced once per day. ETFs trade throughout the day like individual stocks and often have lower fees.

You need a brokerage account to buy either one. A brokerage is a company that holds your money and lets you buy and sell investments. Most brokerages charge no fee to open an account and no fee to buy index funds or ETFs.

Key Takeaways

  • You buy S&P 500 exposure through an index fund or ETF, not by buying the 500 stocks separately.
  • Index funds and ETFs both track the same 500 companies but differ in how they trade and what they cost per year.
  • You need a brokerage account, which is free to open at firms like Fidelity, Vanguard, Charles Schwab, or Robinhood.
  • The annual cost of owning an S&P 500 fund ranges from 0.03% to 0.20% per year depending on which fund you choose.
  • You can start with as little as one share, which costs between $300 and $500 depending on the fund.

Opening a brokerage account

Start by choosing a brokerage. The largest and most common are Fidelity, Vanguard, Charles Schwab, and E*TRADE. Smaller brokerages like Robinhood and Webull also offer S&P 500 funds. All of them are free to join. Pick one and go to their website or download their app.

You will enter your name, address, Social Security number, and employment information. The brokerage will verify your identity and ask you to link a bank account. This takes 10 to 15 minutes. Once your account is open, you can transfer money from your bank into the brokerage account. This transfer usually takes one to three business days.

When you open the account, the brokerage will ask what type of account you want. For most people starting out, a taxable brokerage account is the right choice. It has no contribution limits and no age restrictions. If you are saving for retirement, you might instead open an IRA (individual retirement account), which has tax advantages but limits how much you can put in per year and when you can take money out.

Choosing which S&P 500 fund to buy

The three most common S&P 500 index funds are VTSAX (Vanguard), FSKAX (Fidelity), and SWPPX (Charles Schwab). All three track the same 500 companies and cost between 0.03% and 0.04% per year. The difference between them is so small that it does not matter which you choose. Pick whichever brokerage you opened your account with.

The three most common S&P 500 ETFs are VOO (Vanguard), IVV (iShares), and SPY (SPDR). These also track the same 500 companies and cost between 0.03% and 0.09% per year. ETFs trade throughout the day, so their price changes minute by minute. Index funds are priced once at the end of each day. For a beginner, this difference does not matter much.

Do not overthink this choice. The annual cost difference between the cheapest and most expensive S&P 500 fund is less than $10 per $10,000 invested. Pick one and start. You can switch later if you want.

Placing your first purchase order

Once money is in your brokerage account, log in and look for a "Buy" or "Trade" button. Search for the fund you chose by its ticker symbol (for example, VTSAX or VOO). The brokerage will show you the current price and let you enter how many shares you want to buy.

You can buy a fractional share, meaning you do not have to buy a whole share. If one share costs $450 and you have $100, you can buy 0.22 shares. This is standard at all major brokerages now. Enter the dollar amount you want to invest, and the brokerage will calculate how many shares that buys.

Review the order and click "Confirm" or "Submit". The order goes through immediately if you are buying an ETF during market hours (9:30 a.m. to 4 p.m. Eastern time, Monday through Friday). If you are buying an index fund, it will be priced at the end of that trading day and settle the next day.

Understanding annual costs and fees

Every fund charges an annual fee called an expense ratio. This is a percentage of the money you have invested. For S&P 500 funds, this ranges from 0.03% to 0.20% per year. On a $10,000 investment, that is $3 to $20 per year.

The fee is taken automatically from your fund's value each day. You do not write a check or see a bill. It just reduces the return you see. A fund with a 0.03% expense ratio will cost you about $3 per year on every $10,000 invested. A fund with 0.20% will cost $20 per year on the same amount.

Some brokerages charge a commission to buy or sell funds. Most major brokerages (Fidelity, Vanguard, Charles Schwab, Robinhood) charge zero commission. Check the brokerage website before you open an account if you want to be sure.

What happens after you buy

Once you own shares of an S&P 500 fund, you own a tiny piece of all 500 companies in the index. The fund automatically rebalances to stay in line with the index as companies are added or removed. You do not have to do anything.

Your shares will go up and down in value as the stock market moves. This is normal. The S&P 500 has historically risen over long periods (10 years or more) but has had years where it fell. If you are investing money you will not need for at least five years, you can ignore the daily price changes.

If you want to add more money later, you can transfer it to your brokerage account and buy more shares the same way. Many people set up automatic transfers from their bank account to their brokerage each month and buy more shares on a regular schedule. This is called dollar-cost averaging and removes the pressure of trying to time the market.

Tax considerations for taxable accounts

If you bought your S&P 500 fund in a regular taxable brokerage account (not an IRA), you will owe taxes on any gains when you sell. You will also owe taxes on dividends the fund pays out each year, even if you do not sell.

S&P 500 index funds and ETFs are tax-efficient because they do not trade the underlying stocks very often. This means you will owe less in taxes than you would with an actively managed fund. Still, keep records of what you paid for your shares and what you sell them for, because you will need this information when you file taxes.

If you are saving for retirement, consider opening an IRA instead of a taxable account. IRAs let your money grow without annual tax bills. You pay taxes only when you withdraw money in retirement.

Frequently Asked Questions

Do I need a lot of money to start?

No. Most brokerages let you buy fractional shares, so you can start with $1, $10, $100, or any amount. The smaller your starting amount, the longer it will take to build wealth, but you can start whenever you have money to invest.

Should I buy an index fund or an ETF?

For most beginners, it does not matter. Both track the same 500 companies and cost nearly the same per year. ETFs trade throughout the day like stocks; index funds are priced once at day's end. Pick whichever your brokerage makes easiest to buy.

What if the market crashes after I buy?

Market crashes are normal and have happened many times. If you do not need the money for at least five years, the historical pattern shows the market recovers and goes higher. Selling during a crash locks in losses. Staying invested through downturns is how most long-term investors build wealth.

Can I lose all my money?

The S&P 500 is 500 large, established companies. For all 500 to fail at once would require a collapse far worse than any event in modern history. You can lose money in the short term if the market falls, but the risk of total loss is extremely low over a 10-year period or longer.

Do I have to reinvest the dividends?

No, but most people do. S&P 500 funds pay dividends (usually around 1% to 2% per year). Your brokerage can automatically reinvest these dividends to buy more shares, which speeds up growth. You can turn this on in your account settings.