What is the S&P 500? (And How It Can Help You Build Wealth)
Find out how tracking this index can be a path to building wealth.
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In the world of investing, the S&P 500 is often used as one way to measure or gauge the stock market and whether it’s trending up or down. You may be confused about what the S&P 500 is or why it should matter to you. In this article, we’ll clearly explain all the details related to the S&P 500, and we’ll answer the most common questions asked by new investors.
What is the S&P 500?
The S&P 500 Index, also known as the Standard & Poor's 500 Index, is an index composed of 500 publicly traded companies in the United States. The index includes large companies, although not necessarily the 500 largest because other factors also influence a company's inclusion in the S&P 500. It's also important to note that companies from a wide range of industries and sectors are included in the S&P 500.
Many investors find it useful to follow the S&P 500 because it reflects how America’s biggest corporations are doing. It's one of the best representations of the current state of American large-cap stocks. As a result, the S&P 500 is often used as a gauge for the stock market as a whole.
S&P 500 vs. Dow Jones
The S&P 500 is often confused with the Dow Jones Industrial Average (DJIA), which is another leading index that measures the success of large-cap stocks. The DJIA contains 30 different companies, while the S&P 500 includes 500 companies.
Since the S&P 500 includes many more companies than the DJIA, it's usually considered a better representation of the market as a whole.
It's also important to note that the two indexes are weighted differently. The S&P 500 is market-cap-weighted, which means companies with the largest market capitalizations (generally the biggest companies) get heavier weighting in the index. The DJIA is a price-weighted index, so the companies with higher stock prices get the heaviest weighting.
S&P 500 vs NASDAQ
The NASDAQ 100 is a technology-heavy index that tracks 100 of the largest securities traded on the NASDAQ stock exchange. Like the S&P 500, NASDAQ is also market-cap-weighted.
The NASDAQ is heavily influenced by internet and biotechnology companies, while the S&P 500 is a more diverse index with representation from many different sectors. As a result, the S&P 500 is a better or more accurate gauge of the stock market as a whole, while NASDAQ is more representative of tech stocks in particular.
What Companies Are in the S&P 500?
Generally, the 500 largest U.S. public companies are included in the S&P 500. The specific companies included will change over time, but some of the current companies include well-known names like:
- Alphabet (the parent company of Google)
- Bank of America
- Campbell's Soup
That's just a small sampling, but you can see that a wide range of industries are included.
What is the Average Return of the S&P 500?
Historically, the S&P 500 produces average returns of just less than 10% per year (source). Of course, there are ups and downs, but any investment that averages close to 10% per year over the long run is a solid investment. Over the past ten years, the average return has been about 13% (source).
Why S&P 500 Index Funds are a Popular Investment
Investing in S&P 500 index funds is easy (more details in the next section), and for long-term investors, the returns produced by the S&P 500 are tough to beat. Of course, there are many different types of investments available, but very few people are able to consistently pick stocks or investments that outperform the stock market over the long run.
If you're looking for a simple way to grow your wealth, you may want to consider investing in a fund that tracks the S&P 500. Investing in the S&P 500 will involve some ups and downs, but it's considered a relatively safe option for long-term investors who are willing to wait through any short-term volatility.
S&P 500 index funds are also popular because it's a set-and-forget type of investment. If this is your approach, you don't need to keep a constant eye on your investments, and you won't need to make frequent decisions about your strategy. Instead, all you need to do is invest in the S&P 500, give your money time to grow and compound, and add more to your investments when you're able.
How to Invest in the S&P 500?
Index funds were created so average investors can easily get exposure to stock market indexes like the S&P 500 without making complicated investments or trying to pick individual stocks. There are many different exchange-traded funds (ETFs) that track the S&P 500, and most of these ETFs come with very low expense ratios, which means you'll lose very little of your investment to fees.
Some of the most popular options include:
- Vanguard's S&P 500 ETF (VOO)
- SPDR S&P 500 ETF (SPY)
- iShares Core S&P 500 ETF (IVV)
Is Investing in the S&P 500 Right for You?
Investing in an S&P 500 ETF is an ideal choice for:
- Long-term investors, including those who are saving for retirement.
- Investors who prefer simplicity.
- Investors who want to minimize their investment fees.
- Investors who are not interested in trying to beat the market.
Over the long run, there are relatively few investments that consistently outperform the S&P 500 index. As a result, you may feel that trying to beat the market isn't worth the risk when you can simply invest in an S&P 500 ETF.
Frequently Asked Questions
What does it mean to be an S&P 500 company?
An S&P 500 company is one the is included the S&P 500 Index. The index includes roughly 500 of the largest U.S. stocks. If a company's stock is included in the S&P 500 Index, it would be considered an S&P 500 company.
What type of companies are in the S&P 500?
The S&P 500 Index includes large-cap U.S. stocks from a wide variety of industries and sectors. In general, the largest publicly traded U.S.-based companies are included.
Is now a good time to buy index funds?
Index fund investing isn't about trying to time the market. The idea of index fund investing is that over a long period of time, the value of the index will increase. As a result, it's always a good time to buy index funds if you're planning to hold them for a long time. There will be some turbulence along the way and your investment will drop in value, but if you hold it for the long-term, the value should increase by the time you sell.
Is the S&P 500 a good investment?
History shows that the S&P 500 is a solid investment with about 9-10% annual returns. There are relatively few investments that outperform the S&P 500 over a long period of time.
Can you invest directly in the S&P 500?
No, you cannot invest directly in the S&P 500. It's an index that tracks 500 of the largest companies, but not an actual fund you can invest in. However, there are many exchange-traded funds (ETFs) that track or replicate the S&P 500 as closely as possible. If you want to invest in the S&P 500, choosing one of these ETFs is the best way to do it.
The opinions expressed in this article are for general information purposes only and are not intended to provide specific advice or recommendations about any investment product or security. This information is provided strictly as a means of education regarding the financial industry.