How to Invest in the S&P 500: Things You Need to Know

Investing

How to Invest in the S&P 500: Things You Need to Know

Investing

While the most common way to invest in the stock market might be through purchasing stocks and bonds, it isn’t always the best way to go about it. One of the most popular methods among investors is to invest in index funds which are used to track the performance of an index such as the S&P 500. The S&P 500 Index is very famous for providing great long term returns. As a matter of fact, it has given an average annual return of 13.66% over the last 10 years. In case you are interested in the S&P 500 and want to invest in it, this post has got you covered. Let’s get started.

Here’s what you need to know to invest in the S&P 500 Index:

What is the S&P 500 Index?

The S&P 500 Index is an index fund, which is a fund based upon a predetermined set of stocks and bonds. When you invest in an index fund, it doesn’t pick individual stocks for you to invest in. What it does is spread your investment across a wide range of stocks that mimic the index. One of the most well-renowned funds of this kind is the S&P Index fund. The S&P Index was created in 1957 by Standard & Poor. It measures the performances of all of the major publicly traded companies in America. It also measures the health of the US stock market and is trusted and used by many financial firms. Even though the index is called the S&P 500, there are actually 505 companies in it, such as Apple, Microsoft, Johnson & Johnson, and Berkshire Hathaway.

Why should you invest in the S&P 500 Index?

  • Investing in mutual funds/ETFs that track the S&P 500 is a smart strategy for any investor. The fund manager purchases all or a representative sample of the stocks, bonds, and securities that are present within the index.
  • Investing in the S&P 500 tracking funds is a passive investment strategy that doesn’t require a lot of hands-on work by the investor.
  • Investing in ETFs and mutual funds provides a great deal of diversification to your portfolio. Your money is spread across numerous stocks and bonds which is great for your portfolio.
  • Spreading your investments around minimizes your losses (if incurred) as well. If the stock of one of the companies in the portfolio drops, you won’t feel the brutal brunt of that loss as the performance of other stocks in the fund will offset that loss.
  • Since the S&P 500 Index funds don’t require active management, they end up costing less than other investment options in the stock market. This increases your returns even more.

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S&P 500 Index vs. The Total Stock Market

While you plan your perfect investment strategy, you might arrive at the crossroads between the S&P 500 Index fund or a Total U.S. Stock Market fund.

While the S&P 500 Index only consists of 505 firms, the Total US Stock Market fund features every single publicly traded company, regardless of how big/small it is. These companies range from large-cap stocks and small and mid-size caps that aren’t included in the S&P 500. However, total market funds tend to cost more and are not as easily available as the S& P 500 tracking funds.

Ways to Invest in the S&P 500

There are two main ways to invest in the S&P 500 Index:

  • ETFs
  • Mutual Funds

Always keep the fund’s weight in mind while selecting the right fund for yourself. When you practice equal weight investing, all of a portfolio’s stocks are weighted equally, regardless of their size. As you might have noticed, it is starkly different from the usual cap-weighted investing which works on the principle of weighing every stock based on its market capitalization.

Steps to Invest in the S&P 500

Here are the steps you need to take in order to start investing in the S&P 500

1. Identify target S&P 500 investment

Choose between a mutual fund or ETF. After making your decision, track the best performing funds which track the S&P 500.

2. Open a brokerage account or IRA

In case you have an IRA, you can use that account to invest in mutual funds and ETFs that track the S&P 500 Index’s performance. In case you don’t have the IRA, you will need to get a brokerage account. In your search for the right brokerage firm, don’t forget to consider factors such as minimum required investments, fees, and types of funds offered. You can also try robo-advisors for an even more hands-off experience. Robo-advisors do your investment for you by allocating your money based on your risk tolerance and goals. This automates your investment process and you won’t have to do anything yourself.

3. Buy shares of mutual funds or ETFs

If you get stuck at choosing among these two, these are some of the differences that you should consider.

Mutual funds can only trade once per day, after 4 PM ET, when the market closes. In case you place an order after the closure, it will only be completed upon the closure of the market on the next day. This delay can cause a stark change in the price of the mutual fund, which can cause a setback to your investment strategy.

 

ETFs are better suited for an active investor since they pretty much trade in the same way as stocks. However, you do get the benefit of investing in a group of securities. ETF trades can also be carried out throughout the day. Unlike mutual funds, you won’t have to wait for the market to close to execute a trade. ETFs are also more flexible with regards to pricing. Some of the options they come with are:

  • Market order: When you follow this, you buy or sell a security immediately. It guarantees the time of sale, however, the price is not guaranteed as the sale will just be made as per the price prevailing at the time of the sale.
  • Limit order: Under a limit order, your security trade will be carried out only if it reaches or improves on a set price.
  • Stop order: In this type of order, securities are traded once they reach a certain point, known as the stop point.
  • Buy stop order: When you place a buy stop order, your order will be entered at a stop price that is above the market price. This is a great method to limit your losses.

 

Investment in an S&P Index fund is a great way for you to diversify your portfolio and reap the benefits of the awesome returns offered by the S&P 500. The S&P 500 is great for new investors as well, even if they want to invest with a more hands-off approach. Hopefully, the information provided in this blog will help you get started with investing in the S&P 500.

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