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

The S&P 500 is a list of 500 large American companies whose stock prices are tracked together. When you invest in the S&P 500, you own a small piece of all 500 companies at once, rather than betting on one company alone. Most people who invest long-term own S&P 500 funds because the risk spreads across hundreds of businesses, and the overall U.S. economy has historically grown over decades.

You do not buy the S&P 500 directly. Instead, you buy a fund — a bundle of stocks that mirrors the 500 companies — through a brokerage account. The fund holds all 500 stocks for you, and you own shares of that fund. Two main types exist: index funds and exchange-traded funds (ETFs). Both track the same 500 companies, but they trade slightly differently and have different fee structures.

Key Takeaways

  • You invest in the S&P 500 by opening a brokerage account and buying shares of an S&P 500 index fund or ETF, not by buying individual stocks.
  • Index funds and ETFs both track the same 500 companies but differ in how they trade and what fees they charge; ETFs trade like stocks during market hours, while index funds trade once per day.
  • Common S&P 500 funds include VOO, SPY, and IVV (ETFs) and VFIAX or FSKAX (index funds), each with different expense ratios that affect your long-term returns.
  • You can open a brokerage account at firms like Vanguard, Fidelity, or Charles Schwab, and most charge no commission to buy funds.
  • Starting small and investing regularly over time typically builds wealth more reliably than trying to time the market or pick individual stocks.

Opening a brokerage account

A brokerage account is where you hold money and buy investments. You open one by choosing a brokerage firm, providing your name, address, Social Security number, and employment information, and linking a bank account to transfer money in. The process takes 10 to 20 minutes online, and most brokerages approve you the same day.

Major brokerages that offer S&P 500 funds include Vanguard, Fidelity, Charles Schwab, and E*TRADE. Each charges no commission to buy most index funds and ETFs, so the main difference is the user interface and the specific funds they offer. If you already have a retirement account (401(k) or IRA), you may already have access to S&P 500 funds through that account's brokerage.

You will need to choose between a regular taxable brokerage account and a retirement account. A taxable account has no contribution limits and no withdrawal restrictions, but you pay taxes on gains each year. A retirement account (traditional or Roth IRA) has annual contribution limits but offers tax advantages — either tax-deferred growth or tax-free withdrawals in retirement. Most people start with a retirement account if they have not maxed one out yet.

Choosing which S&P 500 fund to buy

Once your account is open, you search for S&P 500 funds by name or ticker symbol. The most common ETFs are VOO (Vanguard S&P 500 ETF), SPY (SPDR S&P 500 ETF), and IVV (iShares Core S&P 500 ETF). The most common index funds are VFIAX (Vanguard S&P 500 Index Fund) and FSKAX (Fidelity S&P 500 Index Fund). All five track the same 500 companies and will perform nearly identically over time.

The main difference between them is the expense ratio — the annual fee the fund charges as a percentage of your money. VOO charges 0.03%, VFIAX charges 0.04%, and IVV charges 0.03%. These are extremely low. On a $10,000 investment, you pay $3 to $4 per year. Over decades, even small differences in fees add up, so lower is better, but the difference between 0.03% and 0.04% is negligible for most investors.

If you are investing through a 401(k) at work, your employer's plan offers specific S&P 500 funds you cannot choose from outside that plan. Check your plan documents or call the plan administrator to find the S&P 500 option available to you. Many workplace plans offer index funds with expense ratios under 0.10%.

How to place your first purchase

Once you have chosen a fund, log into your brokerage account and search for the fund by ticker symbol (VOO, VFIAX, etc.). The fund's page will show its current price, performance history, and expense ratio. You decide how much money to invest — you can start with as little as $1 with most brokerages, though some funds have $1,000 or $3,000 minimums for the first purchase.

Enter the dollar amount or number of shares you want to buy, review the order, and submit it. If you are buying an ETF during market hours (9:30 a.m. to 4 p.m. Eastern time on weekdays), the order executes immediately at the current price. If you are buying an index fund, the order processes after the market closes that day, and you receive shares at the closing price.

After the purchase, the fund appears in your account holdings. You own fractional shares if you invested an amount that does not divide evenly into the share price. You can check your balance and performance any time, though checking daily often leads to panic selling during downturns. Most long-term investors check their accounts quarterly or annually.

Investing regularly over time

A common strategy is dollar-cost averaging — investing the same amount every month or every paycheck, regardless of whether the market is up or down. This removes the pressure to time the market perfectly and builds discipline. If you invest $500 monthly for 30 years, you contribute $180,000 total, but the fund's growth typically multiplies that into a much larger sum.

Many brokerages offer automatic investment plans where you set up a recurring transfer from your bank account to your brokerage, then automatically buy the fund on a set date each month. This removes the need to remember to invest and keeps you consistent. You can change or stop the automatic purchase at any time.

Reinvesting dividends — the small cash payments the fund distributes quarterly — is another way to grow your investment without adding new money. Most brokerages default to reinvesting dividends automatically, which means the cash buys more shares of the fund immediately. This compounds your growth over time.

Understanding costs and taxes

The expense ratio is the only ongoing cost you pay directly. You do not pay a commission to buy or sell most S&P 500 funds at major brokerages. Some brokerages charge account maintenance fees if your balance falls below a minimum (usually $10,000 to $25,000), but most waive this fee if you set up automatic monthly investments.

In a taxable brokerage account, you owe capital gains tax when you sell shares for more than you paid, and you owe tax on dividends each year. In a traditional IRA, you pay no tax until you withdraw in retirement. In a Roth IRA, you pay no tax on gains or withdrawals if you follow the rules. Tax treatment varies significantly by account type, so consider consulting a tax professional if you have a large investment.

What happens if the market drops

Market downturns are normal and happen roughly every 5 to 10 years. When the S&P 500 falls 20% or more, many new investors panic and sell, locking in losses. Historical data shows that investors who stayed invested through downturns and kept buying recovered their losses and went on to new highs. Selling during a downturn and sitting in cash means you miss the recovery.

If you are investing for retirement and do not need the money for 10 or more years, downturns are actually opportunities to buy more shares at lower prices. If you are investing for a goal within 5 years, consider keeping that money in a savings account instead, because you may not have time to recover from a downturn.

Frequently Asked Questions

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

Theoretically, yes, but it would require all 500 large American companies to fail simultaneously, which has never happened. The S&P 500 has recovered from every downturn in its 70-year history. Individual stocks can go to zero; the S&P 500 as a whole has not.

How much money do I need to start?

Most brokerages let you start with $1. Some S&P 500 funds have $1,000 or $3,000 minimums for the first purchase, but you can buy fractional shares at most brokerages, so you can invest any amount. Starting small and investing regularly is more important than waiting to have a large lump sum.

Should I buy an ETF or an index fund?

For most people, the choice does not matter much. ETFs trade during market hours like stocks; index funds trade once per day. ETFs may have slightly lower expense ratios. Index funds are simpler for automatic monthly investing. Pick whichever your brokerage makes easiest and stick with it.

Do I need to pick individual stocks instead of a fund?

Most professional investors underperform the S&P 500 over 15-year periods. Picking individual stocks requires significant time and skill, and most people do worse than simply buying the whole index. The S&P 500 fund is a proven, low-maintenance way to build wealth.

What if I need the money before retirement?

You can withdraw from a taxable brokerage account anytime without penalty. You pay capital gains tax on profits. Withdrawing from a retirement account (IRA or 401(k)) before age 59½ typically triggers a 10% penalty plus income tax, with limited exceptions. Keep money you need within 5 years in a savings account instead.