How To Invest In The S&P 500: A Beginner’s Guide

Discover how to invest in the S&P 500 using index funds and learn what factors need to be considered for successful investing.

by | Last updated 14 Feb, 2023 | Index Investing

Young traders looking at stock market patterns to build an investment strategy

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The Standard & Poor’s 500, or S&P 500, is arguably the most popular stock market index in the United States, with many investors wanting to learn how to invest in it. It contains 500 of the largest US companies by market capitalisation representing 80.5% of the total US stock market.

Its origin dates back to 1927, but it wasn’t until 1957 that the S&P 500 would evolve into the index as we know it today. Historically, the S&P 500 has achieved an average annual return of 10.2%. This double-digit growth is why the index has become popular among investors.

How to invest in the S&P 500?

A stock market index is not a tradable security. They exist as a hypothetical portfolio of stocks or other financial instruments to track a particular sector’s performance or the general stock market. Therefore, it’s not actually possible to invest in the S&P 500 directly.

However, it’s possible to indirectly invest in the index using an index fund tracking it.

1. Open a brokerage account

Before being able to make any form of investment in the stock market, an investor needs to have access to a brokerage account.

There is a wide variety to choose from, each offering different features, pricing structures, and special qualifications. Investors need to spend time finding a broker that is most suitable to their personal circumstances.

For UK investors seeking to buy shares in an S&P 500 exchange-traded fund or mutual fund, the choices available on the London Stock Exchange could be quite limited. After all, this particular index contains solely US stocks listed internationally. Therefore, when searching for a brokerage account, it’s important to check whether international trading is possible and any additional fees involved.

Beyond selecting the right broker, investors also need to consider what type of account they need to fulfil their investment objectives.

  • Standard Account – This is the most common type of investment account. Investors deposit capital which can then be used to invest in an array of financial products, including stocks, bonds, mutual funds, trusts, and ETFs. In the United Kingdom, all capital gains and dividends received through investments in a standard trading account are subject to tax.
  • Employer-Sponsored Retirement Account – This is a special investment account with certain tax benefits. However, withdrawals from this account are limited until investors reach a certain age. They are designed to be a saving instrument for pensions. The most common type of employer-sponsored retirement account in the United States is a 401(k).
  • Stocks and Shares ISA Account – This is a special tax-efficient investment account for British investors only. All capital gains and dividends received from investments within a Stocks and Shares ISA are tax-free. However, investors are limited to depositing a maximum of £20,000 per year.
  • Self-Invested Personal Pension (SIPP) Account – This is a particular tax-deferred investment account for British investors only. Capital gains and dividends received from investments are protected from tax. However, investors cannot withdraw any funds until reaching the age of 55 (57 from 2028). When funds are taken out, they are taxed as regular income.

2. Pick an index fund 

With an investment account set up and funded, the next step is to find the most appropriate index fund. To replicate the performance of the S&P 500, investors need to focus on finding the index funds which track the S&P 500.

It’s worth noting that plenty of different index funds track the same index. However, they may be structured differently. Investors need to decide whether a mutual fund or exchange-traded fund is the most appropriate option.

Related: ETF vs Mutual Fund: What’s the Difference?

Beyond this, it’s important to check certain characteristics of the available options. Some key factors to consider include the following:

  • Expense Ratio – As index tracker funds are typically passively managed, the annual management fees are reasonably low. However, they are not zero. And some may even charge entry fees when first buying shares or exit fees when selling shares. The expense ratio combines all these costs, adversely affecting the overall investment return. On average, the expense ratio of a passive fund typically lies between 0.05% and 0.15%. Generally speaking, investors should focus on the funds that charge the lowest fees.
  • Minimum Investment Requirements – Some index tracker funds require investors to purchase a minimum amount of shares. This is typically more common among certain mutual funds rather than ETFs. Nevertheless, minimum investment requirements could create barriers to entry for lower net-worth investors.
  • Dividends – All shareholders in an index fund are entitled to receive dividends from the companies inside the fund’s investment portfolio. However, depending on the dividend policy, any received income may be automatically reinvested into the fund’s portfolio rather than distributed to shareholders’ investment accounts. This type of dividend policy is more commonly referred to as accumulation.

Alternatively, investors could bypass the expense ratio cost entirely by simply buying each S&P 500 share individually. However, taking this approach may prove to be more expensive and time-consuming. After all, it would require a lot of transactions. And buying and selling stocks isn’t free. Even commission-free trading platforms have hidden fees that can eat into capital.

3. Buy shares in the Index fund 

With a brokerage account secured and a suitable index fund selected, the last step is to buy shares in the fund chosen, and the process is complete. As a quick reminder, if an investor decides to buy shares in a mutual fund rather than an exchange-traded fund, the trade will only be executed at the end of the current trading session.

Advantages of investing in the S&P 500

The S&P 500 is tracked by thousands of professionals and investment powerhouses for many reasons. As previously mentioned, it’s the US stock market’s most widely used benchmark index. But what are some of the key advantages for index investors?

  • Instant diversification – Investors indirectly purchase shares in all the companies that make up the S&P500 index. Within a single transaction, they gain exposure to the HealthcareFinancialsConsumer DiscretionaryIndustrialsTechnologyEnergyConsumer StaplesMaterials, and Communications sectors, among others, across 500 companies.
  • Impressive Returns – By investing in an S&P 500 index fund, investors can replicate the returns of the US stock market, which historically goes up significantly over long time periods.
  • Low Fees – Index tracker funds are almost always passively managed. Lower management fees come with a smaller expense ratio and, subsequently, deal less damage to total investment returns. Investing through an index fund is also typically more cost-effective than buying shares of each individual stock in an index.

Disadvantages of investing in the S&P 500

Like any investment, the S&P 500 also has some significant disadvantages that investors need to consider before investing in a tracking index fund.

  • High Concentration – Despite containing 500 companies, the index is weighted by market capitalisation. As such, the largest companies within the index have the most influence. As such, the top 10 companies in the index drive nearly 30% of the index’s movements which can open the door to increased volatility during periods of economic turmoil.
  • No Control – Index tracker funds do not have a stock selection criteria beyond a business being a constituent of the index being tracked. As such, it’s possible for investors to indirectly own shares in companies that may not align with their ethical or moral values. For example, there are several tobacco stocks within the S&P 500. However, there is no way to avoid these businesses when buying shares in an index fund. 
  • Limited Exposure – While the index covers virtually every industry, the majority of its constituents reside within the large-cap stock territory. As such, investors have little exposure to mid-cap and small-cap stocks which can provide superior returns.

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

While the S&P 500 might be home to some of the largest companies in America, it still doesn’t make it a risk-free investment. Internal or external forces can disrupt even large businesses. In 2022, a culmination of inflation, rising interest rates, supply chain disruptions, and a geopolitical conflict caused the S&P 500 to drop by more than 20%.

Therefore, yes. Investors can still lose money by investing in the S&P 500.

Top 10 S&P 500 stocks 

Below are the top 10 S&P 500 stocks in order of market capitalisation and, therefore, weighting as of 14 February 2023

1Apple IncAAPLTechnology
2Microsoft CorporationMSFTTechnology IncAMZNConsumer Discretionary
4Berkshire HathawayBRK.BFinancials
5Alphabet IncGOOGLCommunications
6NVIDIA CorporationNVDATechnology
7Tesla IncTSLAIndustrials
8Exxon Mobil CorporationXOMEnergy
9UnitedHealth GroupUNHHealthcare
10Johnson & JohnsonJNJHealthcare

Alternatives to the S&P 500

The S&P 500 is not the only stock market index investors can buy through index funds. Below are some alternatives to it. 

  • Dow Jones Industrial Average – One of the oldest indices in the world, containing 30 prominent US blue-chip companies. 
  • Russell 2000 – Maintained by the FTSE Russell Group, a London Stock Exchange Group subsidiary, is a list of 2000 mid-cap and small-cap stocks listed in the United States.
  • FTSE 100 – The stock market index tracks the performance of the largest 100 UK stocks by market cap.
  • FTSE 250 – This stock market index tracks the performance of the 101st to the 250th largest UK stocks by market cap.
  • FTSE AIM 100 – This index includes the largest 100 UK stocks by market capitalisation, which have their primary listing on the Alternative Investment Market (AIM).

The bottom line 

Representing over 80% of the entire US stock market, the S&P 500 is one of the most widely tracked Indices by individual and institutional investors alike. Despite containing American stocks, UK investors can still tap into the opportunities created by the index with an appropriate brokerage account.

Whether investing in an S&P 500 tracker fund is a good investment depends on each investor’s personal risk tolerance, time horizon, and investment goals. Therefore, investors need to consider their personal circumstances before committing to an investment.

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This article contains general educational information only. It does not take into account the personal financial situation of the reader. Tax treatment is dependent on individual circumstances that may change in the future, and this article does not constitute any form of tax advice. Before committing to any investment decision, an investor must consider their individual financial circumstances and reach out to an independent financial advisor if necessary.

Written By

Prosper Ambaka, Esq.

Prosper is a self-taught financial analyst and investor with years of experience. Inspired by Benjamin Graham, he employs a value-investing school of thought throughout his analyses. This has led to Prosper developing a wealth of knowledge in equities, foreign exchange, commodities, and global macroeconomic issues.

In 2019, he completed his Law degree and was called to the Nigerian Bar in 2021. Outside The Money Cog, Prosper encourages others to join the investment community through his lectures on financial literacy as well as investing strategies.

Current Holdings


Edited & Fact Checked By
Zaven Boyrazian MSc

Zaven has worked in several industries throughout his career, from aircraft factories to game development studios. He has been actively investing in the stock market for the better part of a decade, managing over $1 million across multiple portfolios.

Specializing in corporate valuation, Zaven employs a modern take on the principles set out by Benjamin Graham to find new opportunities at fair prices.

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