What Is the S&P 500? How It Works and How to Invest in It

When news anchors say "the market was up today," they usually mean the S&P 500. It is the most widely followed measure of U.S. stocks, the benchmark most professional fund managers try to beat, and one of the easiest things for a beginner to invest in.

What is the S&P 500?

The Standard & Poor's 500 is a stock market index that tracks about 500 of the largest publicly traded U.S. companies. It is maintained by S&P Dow Jones Indices and covers roughly 80% of the total value of the U.S. stock market, which is why it's used as a stand-in for "the market."

An index is just a list and a scoreboard. You can't buy the index itself, but you can buy funds that hold every company in it.

How companies get in

Inclusion isn't automatic. A committee selects companies based on rules that include:

• Being a U.S. company listed on a major U.S. exchange
• A large market value (the minimum is updated periodically)
• Enough shares available for public trading, and enough trading volume
• Positive earnings over recent quarters

Companies are added and removed regularly as they grow, shrink, merge or are acquired. That is one reason the index has stayed relevant for decades.

How the S&P 500 is weighted

The S&P 500 is market-cap weighted (float-adjusted). Bigger companies count more. A company worth $3 trillion moves the index far more than one worth $30 billion.

This has a practical effect: in recent years the largest handful of companies, mostly big technology names, have made up a large share of the index, with the top 10 together accounting for roughly a third or more. When those giants have a good or bad day, the whole index feels it.

There are also equal-weight S&P 500 funds that give each company the same weight, for investors who want less concentration in the biggest names.

Long-term performance

Over long periods, the S&P 500 has returned roughly 10% per year on average before inflation, with dividends reinvested. That average hides huge swings:

• Some years gain 20–30% or more.
• Some years lose a lot. The index fell about 37% in 2008 and about 18% in 2022.
• Bear markets (drops of 20% or more from a peak) have happened many times, followed historically by recoveries, though some took years.

Past performance doesn't guarantee future returns. But the long-run record is the main reason so many advisers recommend a broad index fund as the core of a long-term portfolio.

How to invest in the S&P 500

1. Open an account. A 401(k) (many plans include an S&P 500 index fund), an IRA, or a regular brokerage account. See Roth vs traditional IRA.
2. Choose an S&P 500 index fund or ETF. Several large fund companies offer them, and the cheapest charge only a few hundredths of a percent per year. Compare formats in index funds vs ETFs.
3. Compare expense ratios, since funds tracking the same index own the same stocks.
4. Invest regularly. Automatic monthly contributions use dollar-cost averaging.

Is the S&P 500 enough on its own?

It is a solid core, but it isn't everything:

• Only large U.S. companies. It leaves out small and mid-size companies, which a total-market fund includes, and international stocks.
• All stocks, no bonds. As you near a goal like retirement, many people add bonds to reduce swings.
• Concentration. The heavy weight of the largest companies means less diversification than "500 stocks" suggests.

A simple, common approach is pairing a U.S. stock index fund with an international fund and a bond fund, or using a single target-date fund.

S&P 500 vs the Dow vs the Nasdaq