How to invest in the S&P 500?

The S&P 500 is perhaps the most well-known stock market index, representing the performance of 500 of the largest publicly-traded companies in the United States.

Often considered a benchmark for the overall U.S. stock market, the S&P 500 attracts countless investors aiming to take advantage of its historically strong returns. However, if you're new to investing, you might be wondering how to invest in the S&P 500.

First, it’s important to understand it’s not possible to invest directly in the S&P 500 index. However, it is possible to invest in index funds that mirror the performance of it, or to invest in the individual stocks that make up the index. These investments can help diversify your portfolio to help you reach your investment goals.

What is the S&P 500 index?

One of the most popular benchmarks for the U.S. stock market is the S&P 500, which tracks 500 of the largest publicly traded U.S. companies, with a combined market cap of over $49 trillion as of early 2025.

Wondering exactly what market cap means? When someone wants to know a company’s value, they will refer to its “market cap.”

A company’s market capitalization, or market cap, is found by multiplying its outstanding shares by the current market price. For example, if a company has 20 million outstanding shares and the current market price of each share is $10, then its market cap is $200 million.

The S&P 500 is widely recognized as an effective gauge for measuring the performance of the U.S. stock market, especially for large-cap stocks.

Why is the S&P 500 used as a benchmark?

The S&P 500 as we know it was developed in 1957, but the original index was developed in 1923 and only covered 233 companies at the time.

The S&P was the first U.S. stock index that used (and still uses) a company’s market cap to determine its weight in the index. That means companies with larger market caps have more influence over the S&P 500’s performance.

The performance of the S&P 500 can be seen as a credible barometer of the health of the U.S. economy because its components represent all 11 of the recognized market sectors including:

Each component of the S&P 500 is weighted according to the aggregate market cap of the companies that make up each component. In other words, every company’s market cap is divided by the total market cap of the S&P 500.

A point of note – the S&P 500 is a float-weighted index, which means that only publicly traded, outstanding shares of each company are used.

Requirements for inclusion in the S&P 500

To be included in the S&P 500, a company must meet certain eligibility requirements:

This helps ensure that only the largest and most stable U.S. companies are included in the S&P 500, which lends credibility to its status as the pre-eminent benchmark for the U.S. stock market.

Can you invest directly in the S&P 500?

You can’t invest directly in the S&P 500. The index isn’t a tangible asset but is instead a collection of 500 selected stocks weighted by market capitalization.

Instead of investing directly in the S&P 500, you must choose between different financial products that are designed to replicate or track its performance.

These are the most commonly used methods:

S&P 500 index funds

You can’t invest directly in the S&P 500. The index isn’t a tangible asset but is instead a collection of 500 selected stocks weighted by market capitalization.

Instead of investing directly in the S&P 500, you must invest in funds that track the index.

These are the most commonly used fund structures:

S&P 500 index ETFs

Exchange-traded funds (ETFs) are traded on stock exchanges, just like individual stocks, which means you can buy and sell them throughout the trading day. ETFs that track the S&P 500 are among the most popular tools for beginner investors.

Some benefits include:

For investors who value flexibility and efficiency, ETFs are an excellent way to start investing in the S&P 500.

S&P 500 index mutual funds

Mutual funds designed to track the S&P 500 are another solid option. While they serve a similar purpose to ETFs, there are some distinct differences.

Some advantages include:

Unlike ETFs, which can be traded continuously, mutual funds are purchased at the fund's net asset value (NAV) determined at the end of each trading day. This can make them more suitable for long-term investors.

How much does it cost to invest in the S&P 500?

To reiterate, there are two ways to invest in the S&P 500: investing in individual stocks in the S&P 500 or investing in an index fund that tracks the S&P 500’s performance.

When investors talk about investing in the S&P 500 they are often talking about the latter. How much you invest in an S&P 500 index fund will largely depend on how much you want to. Some might require that you purchase at least a full share, while others may offer the ability to buy fractional shares.

While S&P 500 index funds are generally considered a cost-effective investment strategy, it’s important to understand the various expenses associated with investing in S&P 500 index funds before you take the leap. Costs vary, but here are a few components to keep in mind:

Expense ratios

Expense ratios represent the annual fee that funds charge shareholders to invest in the fund. Review and compare expense ratios among different funds to make sure you’re selecting a fund that aligns with your investment goals while keeping costs in check.

Transaction costs

You may incur transaction costs when buying or selling shares of S&P 500 index funds. These costs can include brokerage commissions or other transaction fees. Consider these costs, especially if you’re a frequent trader, as they can impact the overall returns of your investment.

Taxes

Investing in the S&P 500 can have tax implications, particularly if you invest in taxable accounts. Capital gains taxes may apply when selling shares at a profit, and dividends received from the underlying stocks may also be subject to tax.

Consult with a tax professional to understand the tax implications of your investment and explore potential strategies to minimize your tax liabilities.

What are the benefits of investing in the S&P 500?

Investing in the S&P 500, either in index funds that mirror the S&P 500 or in individual stocks within the S&P 500, offers several benefits.

Are there disadvantages of investing in the S&P 500?

Investing in the S&P 500 index does comes with risks.  Investing in an S&P 500 index fund, for example, means you’re investing in a broad-based index that tracks the performance of 500 large-cap U.S. companies.

While this provides diversification across different sectors, it also means you have limited control over individual stock selection. If you prefer a more concentrated or customized portfolio, you might opt for individual stocks instead.

How to start investing in the S&P 500

Whether you want to invest in the S&P 500 or another index, there are some basic steps and things to keep in mind when investing:

Step 1: Open a brokerage account

To begin investing, you’ll need access to the stock market via a brokerage account. A brokerage account is essentially an online platform that allows you to purchase and hold assets like ETFs, stocks or mutual funds.

Make sure the platform is user-friendly, especially if you’re still learning about investing. Most importantly, take the time to review fees, including trading fees, account minimums and management fees before signing up. Even if the fees seem small, they can add up over time.

Step 2: Decide on a method of investing

As mentioned earlier, you’ll need to decide on a method of investing. ETFs are highly accessible and offer flexibility to investors, while mutual funds are professionally managed and offer a more hands-off approach.

The decision is yours, but if you’re having trouble determining the right method, you may want to consult with a professional financial advisor.

Step 3: Understand the investment expense ratios

Expense ratios are typically expressed as a percentage of your total investment.

For example, an expense ratio of 0.03% means you’ll pay $0.30 annually for every $1,000 you invest. ETFs tracking the S&P 500 usually have very low expense ratios, making them an appealing choice for cost-conscious investors. Always compare the expense ratios of different funds before investing.

Step 4: Start small and invest regularly

Many investors feel hesitant to begin because they believe they need significant capital to do so. The truth is investing small amounts regularly – referred to as dollar-cost averaging – is another strategy that can help gradually building wealth.

Consider setting up an automated contribution to your brokerage account. This will also help you avoid the temptation of trying to time the market, which is notoriously challenging and often counterproductive. However, it’s important to remember that despite setting up automatic contributions, you’ll still need to purchase specific ETFs or mutual funds in which to invest.

Step 5: Think long-term

Investing in the S&P 500 is a strategy that required patience. The stock market experiences short-term fluctuations, but historically, it has trended upward. By focusing on long-term growth rather than short-term gains, you can take better advantage of compound interest and reduce stress.

A critical factor to success is staying committed to your investment plan. Avoid making reactive decisions when the market dips, and regularly revisit your portfolio to ensure your allocations reflect your financial goals.

Step 6: Regularly review your investment goals

Finally, make sure your decision to invest in the S&P 500 aligns with your personal financial goals. Whether you’re saving for retirement, building an emergency fund or pursuing another objective, evaluate how your investment strategy fits into your overall financial plan.

Before you begin, ask yourself a few simple questions:

Having clarity on these points will help you make more confident decisions as you build wealth.

The bottom line

Understanding how to invest in an S&P 500 index fund is an important component of understanding the stock market.

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