How to Buy S&P 500 Index Fund
Contents
If you hadn’t already heard of the S&P 500 index prior to this year, then you certainly have now. It has been on a record-breaking run which has seen it reach new highs and have some of its best performances in more than 30 years. It is also one of the most consistent performers in the world when it comes to making returns year on year, having risen an average 9.8% year after year for the last 90 years. You will not find many more consistent places to invest.
Here we will run down exactly what the S&P 500 is, and how you can make an investment in an S&P 500 index fund to get in on the act when it comes to one of the most known markets in the world.
What is the S&P 500?
The S&P 500 has been around since 1927. It measures the stock performance of 500 of the largest publicly traded companies in the US. It is typically known as a large cap index featuring only large companies. The fact that a company has to be valued at more than $8 billion to be included is one factor which has furthered this thought.
Which companies are included in the S&P 500 index is decided by committee, and it has an extremely low turnover of companies in both directions. It is typically heavily weighted toward tech, and finance stocks. The likes of Apple, Microsoft, Amazon, and Facebook are all currently in the S&P 500.
From a traders perspective though, the most important point to note here is that, even though the S&P 500 index includes 500 of the top performing US companies and its numbers are looked at and analyzed on a daily basis, you cannot invest directly in the S&P 500 index.
How to invest in the S&P 500
As mentioned, you can’t invest directly in the S&P 500 aside from buy 500 individual stocks which is not really a feasible move. There are still a couple of convenient ways that you can get in on the action though.
There are two main ways in which this is possible. These are to invest in ETFs or an index fund which mirrors the larger index and its performance. There are many of these to choose from, and both options are typically available from the majority of brokers in our online broker directory.
Once you have selected a top broker from the list, there are a few steps you need to follow before you can invest in your S&P 500 index fund. These can take as little as just a few minutes.
Open your broker account: This is of course the first move in any trading decision you wish to make. Opening a broker account with one of the top brokers in the industry is usually a fast, and fully digital process. All you really need is a couple of documents to prove you Identity, and residence and you should be all set to complete the account verification process.
This process can be as fast as just a couple of minutes, with documents uploaded electronically. Your passport and a recent utility bill are the best recommended documents to have on hand.
Choose an S&P 500 index fund: Once you are in and verified with your broker, you can take a more in-depth look at exactly what is on offer. Brokers typically offer a wide range of assets for trading, including some popular S&P index funds.
You should choose the fund which is right for you by looking at all of the variables including the price, expenses, returns, and fees.
Start trading: Once you have selected an S&P index fund you would like to buy, the process is as easy as a couple of clicks presuming you have funded your account. All of the top brokers have very easy to navigate trading platforms which will see you complete you purchase in no time at all. That’s it, you are now the proud owner of an S&P 500 index fund.
Why invest in an S&P 500 index fund?
At this point you may wonder what the benefits are of investing in an S&P 500 fund instead of trading single stocks or other alternatives. There are a few main positive to note in this regard.
The size of the companies that are typically traded with the S&P 500, and by proxy by the index funds, are the largest in the US. With this size comes a certain strength and stability.
Generally speaking, an investment in one of these tends to be less volatile than another choice in a single stock or smaller index fund.
Another similar strength when you are investing in an index fund, is the level of diversification it brings to your portfolio. Suddenly, instead of a handful of stocks, you can be meaningfully invested in hundreds of top companies. This level of diversification works to hedge the risk and exposure you have when you are trading just single stocks.
A final point of attraction investing in the S&P 500 index fund is the low costs that are associated with the investment. Index funds tend to be passively managed. This means they are based on the index and require little or no human trading input. This works to significantly reduce costs enough to make them very cheap to own. Combine this with the ever decreasing spreads from most brokers, and your costs remain at rock bottom.
Final Thoughts
Particularly if you are looking to become a trader for the long term, and you want to get involved in one of the hottest markets in the sector, an S&P 500 index fund could be a great choice for you.
Investing in this kind of index fund, as you can see from the guide, really is just as fast and easy as trading any stock or other asset at a top broker, yet what it delivers is an extremely well-rounded investment that is both respected, and low cost to own.
Kate Leaman is the Chief Analyst and author at InvestorGreg. She won the Sky News Fiona McDiarmad award and subsequently became a journalist for Sky News. Read more
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