Your Step-by-Step Route to Owning the S&P 500, From Account to First Order

To invest in the S&P 500, you buy a fund that tracks it, either an exchange-traded fund such as VOO, SPY or IVV, or an S&P 500 index mutual fund, through a brokerage account, an IRA or your workplace 401(k). You cannot buy the index itself, but a single fund gives you a share of about 500 of the largest US companies at a very low cost.

The steps are simple. Choose the right account, choose the right type of fund, decide how much and how often to invest, and then leave the investment to work over many years.

This guide walks through each step, the costs to compare, how dividends and taxes work, the risks to understand before you start and the mistakes new investors make most often. FRC has no relationship with any fund, broker or index provider mentioned and earns no commission from any investment.

Prefer to watch? FRC’s fact-checked investing playlist on YouTube covers the S&P 500 funds investors use most, including VOO.

What You Are Actually Buying

The S&P 500 is an index of about 500 large US companies, chosen by a committee at S&P Dow Jones Indices and weighted by market value. According to S&P Dow Jones Indices, it covers about 80% of the total value of US-listed stocks.

An index is a calculation, not an investment. To own it, you buy a fund that holds the same companies in the same proportions, so your money rises and falls with the index, minus the fund’s small annual cost.

That one purchase spreads your money across every major sector of the US economy, from technology and healthcare to banks, energy and consumer brands. It is why an S&P 500 fund is one of the most common starting points for new investors.

Learn the Foundations First

Investing in the S&P 500 is simple, but understanding what you own makes it far easier to stay invested when markets fall. FRC’s ETF Investing for Beginners course explains how index funds and ETFs work, how they are priced, what they cost and how they are taxed.

FRC’s programs and memberships are open to everyone, and every course can be spread across interest-free monthly payments. If you are also considering a career in finance, the SIE Examination Preparation course covers investment products and market indexes as part of the exam you can pass before you are hired.

For a wider view of fund investing, FRC’s complete step-by-step guide to investing in ETFs covers everything from choosing a fund to building a full portfolio.

Step One: Choose Where to Hold It

The account you use is as important as the fund you choose, because it decides how your investment is taxed. There are three main options.

A 401(k) or similar workplace plan lets you invest from your paycheck, often with an employer match, and many plans include an S&P 500 index fund. An IRA, either traditional or Roth, offers tax advantages you open yourself, and a taxable brokerage account offers full flexibility with no contribution limits but no special tax treatment.

Many investors use more than one. FRC’s guide to the order to invest your money between a 401(k), IRA and brokerage account explains how to prioritize them.

Step Two: Open the Account

If you are investing through a workplace plan, you choose your funds within that plan. For an IRA or taxable account, you open one with a brokerage firm, usually online in under an hour.

You will be asked for personal details, including your Social Security number and employment information, because brokers are required by law to verify who you are and understand your financial situation. Once the account is open, you link a bank account and transfer money in.

Choosing a broker is a decision in its own right. FRC’s guides to how to choose a brokerage account and brokerage accounts for beginners compare the main options and explain the protections each one offers.

Step Three: Choose an ETF or a Mutual Fund

You can track the S&P 500 through an ETF or an index mutual fund. Both hold the same companies; the difference is how you buy and sell them.

ETFs trade on a stock exchange throughout the day at market prices, like shares. The largest S&P 500 ETFs include the Vanguard S&P 500 ETF (VOO), the SPDR S&P 500 ETF Trust (SPY) and the iShares Core S&P 500 ETF (IVV).

Index mutual funds are bought and sold once a day at the closing price and can be convenient for automatic investing. Examples include the Fidelity 500 Index Fund (FXAIX), the Schwab S&P 500 Index Fund (SWPPX) and the Vanguard 500 Index Fund Admiral Shares (VFIAX), and FRC’s guide to Fidelity index funds explains how some of these compare.

Step Four: Compare the Costs

The main ongoing cost is the expense ratio, the percentage of your investment the fund charges each year. Many of the largest S&P 500 funds charge just a few hundredths of a percent, which makes them among the cheapest investments available.

On a $10,000 investment, a fund charging 0.03% costs about $3 a year, while one charging 0.50% costs about $50. Small differences add up over decades, so compare the current expense ratio on each fund’s own website before you buy. Check whether your broker charges a trading commission or a fee for buying a particular fund; many large brokers charge nothing to trade ETFs.

Also check minimum investments. ETFs usually require only the price of one share, or less if your broker offers fractional shares, while some mutual funds require a minimum initial investment.

Step Five: Decide How Much and How Often

You do not need a large sum to start. Many brokers let you buy fractional shares, so you can invest $50 or $100 at a time in an ETF whose full share costs much more.

Many investors set up automatic monthly investments, a method known as dollar-cost averaging. It builds the habit, removes the temptation to guess the right moment and means you buy more shares when prices are low and fewer when they are high.

If you have a larger amount ready, investing it all at once has historically tended to come out ahead more often, because markets have risen more often than they have fallen, though it can feel harder if prices drop soon after. FRC’s guide to dollar-cost averaging vs lump sum investing explains the trade-off.

Step Six: Place Your First Order

To buy an ETF, search for its ticker in your brokerage account, enter the amount or number of shares and choose an order type. A market order buys at the current price, while a limit order lets you set the most you are willing to pay.

For widely traded funds such as VOO, SPY and IVV, the gap between buying and selling prices is usually tiny during normal trading hours. Placing orders after the market has been open for a while, rather than in the first few minutes, can help you avoid wider price swings.

To buy a mutual fund, enter the dollar amount you want to invest. Your order will be filled at that day’s closing price. Whichever you buy, check the ticker before confirming, because similar tickers can belong to very different funds.

Step Seven: Reinvest Your Dividends

Many S&P 500 companies pay dividends, and your fund passes them on to you, usually every quarter. You can take them as cash or reinvest them automatically into more shares.

Reinvesting dividends lets your investment compound, because each payment buys more shares that then earn their own dividends. Over long periods, reinvested dividends have made up a meaningful part of the S&P 500’s total return.

Most brokers let you switch on automatic dividend reinvestment with a single setting, though reinvested dividends in a taxable account are still taxed in the year they are paid. FRC’s guide to how compound interest builds wealth in ETFs shows how that growth builds over time.

How Taxes Work

Inside a 401(k) or IRA, you pay no tax on dividends or gains while the money stays in the account. Traditional accounts are taxed when you withdraw, while qualified Roth withdrawals are tax-free.

In a taxable brokerage account, dividends are usually taxed each year, often at the lower qualified dividend rates, and you pay capital gains tax when you sell at a profit. Holding for more than a year usually qualifies for lower long-term capital gains rates.

S&P 500 ETFs are generally tax-efficient, because their structure rarely forces them to distribute capital gains. FRC’s guide to choosing tax-efficient ETFs for a taxable brokerage account explains what to look for.

The Risks to Understand Before You Start

The S&P 500 has risen over the long term, but it has also fallen sharply many times. From October 2007 to March 2009, during the financial crisis, it fell by more than half, and in early 2020 it fell by about a third within a few weeks.

Those falls are part of owning stocks. Investors who sold in a panic locked in their losses, while those who held on, and kept investing, recovered as the market did.

The index is also concentrated in its largest companies, so a few very large technology businesses can drive much of its performance. And it holds only US stocks, so it gives no exposure to international markets on its own.

How Long You Should Plan to Hold

Because the S&P 500 can fall sharply in the short term, it is most suitable for money you will not need for many years. Money you may need within the next few years is usually better kept in safer, more stable places.

Over long holding periods, the index’s ups and downs have tended to even out, and the effect of compounding becomes much more powerful. FRC’s guide to how much $500 a month in an S&P 500 ETF could grow over 30 years shows how time and regular investing combine.

The single most important factor is often behavior. Staying invested through difficult markets has historically counted for more than finding the perfect moment to start.

What an S&P 500 Fund Does Not Cover

An S&P 500 fund is broad, but it is not a complete portfolio for everyone. It holds only large US companies, so it leaves out smaller US companies, international stocks and bonds.

Many investors add other funds around it, such as an international stock fund for exposure beyond the United States or a bond fund to reduce swings in value as they get closer to needing the money. The right mix depends on your goals, your time horizon and how much risk you can comfortably hold.

Starting with an S&P 500 fund is common and sensible. Knowing what it does not cover helps you decide what, if anything, to build around it.

Review and Rebalance Once or Twice a Year

Once you are invested, you do not need to check every day. A review once or twice a year is usually enough to make sure your investments still match your plan.

If you hold more than one fund, their weights will drift as markets move. Rebalancing means trimming what has grown beyond your target and adding to what has fallen behind, which keeps your risk where you intended it to be.

Inside a 401(k) or IRA, rebalancing has no immediate tax cost. In a taxable account, selling can trigger capital gains tax, so many investors rebalance by directing new contributions toward the funds that are below target instead.

Common Mistakes New Investors Make

The first is trying to time the market, waiting for a dip that never comes or selling after a fall. Missing even a few of the market’s strongest days can significantly reduce long-term returns, and those days often come soon after the worst ones.

The second is owning the same thing several times without realizing it. An S&P 500 fund, a total market fund and a technology fund can overlap heavily in the same large companies.

The third is ignoring costs and taxes, such as choosing a high-fee fund when a cheaper version of the same index is available, or trading often in a taxable account. Simple, low-cost and patient tends to work better than complex and busy.

How the S&P 500 Compares With Other Indexes

The S&P 500 is not the only way to invest in US stocks. The Dow Jones Industrial Average tracks just 30 companies, while the Nasdaq indexes are concentrated in technology and growth.

Total stock market funds go further than the S&P 500, adding thousands of mid-sized and smaller companies. FRC’s comparison of VOO vs VTI vs QQQ explains how an S&P 500 fund, a total market fund and a Nasdaq-100 fund differ.

For a closer look at how the main indexes are built, FRC’s guides to the Dow Jones vs the S&P 500 and the S&P 500 vs the Nasdaq set out the differences.

Build Knowledge That Lasts

Many people who start investing for themselves discover an interest in how markets work. FRC’s Professional Membership supports that next step, with structured learning, verified progress and a Digital Profile that shows employers what you know.

A QR code on your resume takes an employer to your verified credentials, your exam progress and a short Video Resume in your own voice. It gives them a fuller picture of who you are than a single page can.

Common Questions

How much money do I need to invest in the S&P 500? Very little. Many brokers offer fractional shares, so you can start with a small amount, and some index mutual funds have no minimum investment.

Can I buy the S&P 500 directly? No. The S&P 500 is an index, so you invest through a fund that tracks it, such as an ETF like VOO, SPY or IVV, or an S&P 500 index mutual fund.

Is investing in the S&P 500 safe? It is diversified across about 500 large companies, but it is not safe from losses. It has fallen by more than half in the past, so it is most suitable for money you can leave invested for many years.

Should I choose an ETF or a mutual fund? Both track the same index. ETFs trade throughout the day like shares, while mutual funds are bought at the day’s closing price and can be convenient for automatic investing, so the choice often comes down to your broker and how you prefer to invest.

Do S&P 500 funds pay dividends? Yes. Most pass on the dividends paid by the companies they hold, usually quarterly, and you can take them as cash or reinvest them automatically.

Your Next Step

Investing in the S&P 500 comes down to a few clear decisions: the right account, a low-cost fund that tracks the index, a regular amount you can keep investing, and the patience to hold through the falls.

Start by deciding which account you will use. Then compare two or three S&P 500 funds on cost and convenience, place your first order and set your dividends to reinvest.