Follow these simple steps to start investing in the biggest index on Wall Street.
Before we get into the steps involved in creating an S&P 500 Index fund, it’s important to keep one thing in mind: investing in the stock market has its risks.
You can lose money.
You can even lose a lot of money.
The stock market can be very volatile and therefore risky for any and every investor. It’s not just risk, it’s uncertainty. You will never truly know what the market is going to look like in 2 weeks, 2 months, or even 2 years from now.
So, if you’re prepared for some level of risk, then read on.
Step 1: Open an Account With an Investing Broker
Once you’re ready to start investing, the first thing you’re going to want to do is open up a brokerage account. Some major brokerage companies include Charles Schwab, TD Ameritrade, and E*Trade.
Regardless of the brokerage you choose, opening an account is relatively easy. Simply sign up for an account, specify a username and password, and link your bank account. Now you’re ready to move on to the investing portion of the process.
Step 2: Open an S&P 500 Index Fund
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The S&P 500 is the world’s most popular index. As such, billions of dollars flow into the market through the S&P 500 index and out of it in order to track its movement. So how can you benefit from this?
You can easily invest in the S&P 500 index by purchasing companies that make up the index or exchange-traded funds (ETFs) designed to track the S&P 500.
In this guide, we’ll introduce you to the world’s most popular index and its history before we dig into how you can invest in the S&P 500. We’ll also provide some more specific investment ideas, such as exchange-traded funds and mutual funds, which you can investigate if you’re interested in investing in the S&P 500.
What is The S&P Index?
In the financial world, the term "index" refers to a standard or benchmark that is used to represent a particular section of that world. It's a handy way to show the performance of a particular section of the world of finance, and it makes it easy to determine how well an investment portfolio is doing over time.
In investing, the most popular of all indexes is the S&P 500. This index represents 500 of the largest stocks that are traded on the U.S. stock market.
The 500 stocks that make up the S&P 500 are weighted according to the value of the stock. The larger the value of the stock, the larger the influence on the overall price of the index.
The S&P 500 is the most commonly quoted index. It is commonly watched by investors because it includes the stocks of just about every major company in the U.S. economy. It is also considered by many to be the best gauge of the health of the U.S. economy, since U.S. big companies are the most visible, and the most likely to be traded internationally.
The S&P 500 is also very easy to track. For individual investors or investors who are new to stock trading, it can be found and calculated on a daily basis. It is also a lot less expensive to track this index than it is to track the price of 500 stocks individually.
Open a Brokerage Account
Before you can invest in the S&P 500 Index, you’ll need to open a brokerage account with your —okay, your broker’s— preferred company. The main thing to ask here is how they charge you for making trades. There are various ways to do this, but you may also be charged a fee if you choose this option.
Some brokers will want you to subscribe to a platform. If you’re unsure that this is the right option for you, you may want to go with a flat fee. Once you’re comfortable with the program, you’ll be better able to decide if you should trade on a flat fee or if you should subscribe to a platform.
Ask about the different services that you’ll find in the platform. Financial analysts are great, but you should also make sure that there’s a community and, of course, information about markets and investments. If you’re brand new to investing, then the platform should be incredibly welcoming and offer plenty of educational information.
Choose Between Mutual Funds and ETFs
If you’re interested in investing in the S&P 500 , you have two distinct options. You can either go with an ETF or a mutual fund. You can buy either of the two investments in the form of stock. Mutual funds are a type of investment vehicle that generally tracks the performance of an index. ETFs are a type of stock that contains different securities and that will try to track the performance of an index. As such, you can invest your money in a mutual fund or an ETF.
Benefits of Mutual Funds
There are many mutual funds that will aim to track the performance of the S&P 500. The biggest advantage of investing in a mutual fund is that you don’t have to worry about trying to beat the market. If you buy into a mutual fund, that particular fund will be made up of thousands of different stocks. By purchasing into a mutual fund, you allow an expert who knows a lot about investing to take care of your portfolio. You can sit back and relax, knowing that your investment is being managed by experts. Some mutual funds will also have the option of having your investment automatically reinvested. One of the only drawbacks of a mutual fund is cost. This is because mutual funds generally charge a management fee for taking care of your portfolio. However, this fee will often be very small. You can expect to pay a fee in the neighborhood of 0.5%.
Pick Your Favorite S&P 500 Fund
When you go to invest in the S&P 500, you have several options. You could invest with the S&P directly, you could get an even riskier investment by picking your own stocks, or you could do something in between by buying a mutual fund.
The benefit of investing in the S&P is that you don’t have to pick any of the companies. The companies are picked for you, and the S&P itself will calculate the value of your index fund at the end of every day.
The benefit of picking your own stocks is that the value of your fund is completely dependent in how well you do at picking the right stocks. The more right you are, the greater your returns.
The benefit of mutual funds is that they give you a mix of the two. They require you to select some companies and make choices about the investment in the companies you do pick, but the fund itself will do most of the work for you, and the value of your fund will be determined by the total return of the companies you picked. This is a good middle ground between full automatic investment and full manual investment.
Enter Your Trade
You're an Index Fund Owner!
You've made it. If you've been interested in investing in index funds for some time now, you're likely aware that they can be bought and sold like any publicly quoted stock. You can trade them on the market.
You can, in turn, invest in the entire market through popular index funds like the Standard & Poor's 500. This will allow you to have stock holdings that mirror the performance of the market (in your case, the S&P 500).
There are several ways to engage in index investing that don't involve swapping stocks but we'll address those in another blog post. We'll keep the focus on the actual exchange.
Let's get to it!