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The S&P 500 Index: An Amazingly Simple Investing Guide for Rookie Investors

The stock market encompasses all the buying and selling of equities (stocks, ETFs, etc.) of public companies.

At first glance, investing may seem daunting. In this article, we introduce you to the S&P 500 index. If you are new to investing, this index may be  all you need to know to start building wealth. What is the S&P 500?

​The S&P 500 index: a brief introduction

When people talk about the U.S. stock market, the S&P 500 readily comes to mind. This is an index that trades the stocks of America's 500 largest companies listed on the New York Stock Exchange. If you want to know how the stock market is performing on a daily basis, just monitor the fluctuations of the S&P 500 index. This index is unique in that it represents companies from virtually all U.S. economic sectors.

The sectors of the S&P 500 index

Whether you want to invest in healthcare or energy companies, the S&P 500 has you covered. In fact, the index is composed of companies from roughly 11 different sectors, including real estate, healthcare, industrial, energy, telecom, technology, among others. Here is a complete list of the S&P 500 index economic sectors. What if you could buy the S&P 500 index?

How to buy the S&P 500 index

Can you really buy the S&P 500 index? Unfortunately, you cannot buy the S&P 500 index. However, you can indirectly buy the S&P 500 via index funds. An index fund (video) is a special type of mutual fund that tracks the returns of a broader market index (e.g. the S&P 500, NASDAQ, etc.). An index fund doesn't try to beat an index, in terms of returns; it seeks to match it or give the exact same returns. Let's make this more plain by comparing two S&P 500 index funds: FXAIX (Fidelity 500 Index Fund) and VFINX (Vanguard 500 index funds) against the index itself. We show this comparison below.

Data Source: MarketWatch. Comparison of the Vanguard 500 Index Fund (VFINX) and the Fidelity 500 Index Fund (FXAIX) to the S&P 500 Index. Green line = FXAIX; Black line = VFINX; Blue line = SXP (S&P 500 index). Data current as of 4/16/19.

As you can see above, both index funds have yielded similar returns to those of the S&P 500 index. As of April 16, 2019, the YTD returns of both index funds (VFINX and FXAIX) sit at a comfortable 16.00%. Each time the S&P 500 index goes through peaks (gains) and valleys (losses), both index funds follow a similar trading pattern. The small 0.04% difference between the index funds and the S&P 500 index is due to the fact that FXAIX is composed of 508 stocks and VFINX has 516 stocks as of 4/16/19. The S&P 500 has exactly 500 stocks.

The bottom line

The S&P 500 index should serve as a main starting point for any new investor. You can indirectly buy the S&P 500 index via index funds. If you are interested in investing but are unsure where to begin, a low-cost index fund is a good starting point. If you prefer to leave investing to the pros, Wealthsimple and Acorns may be able to suit your investing needs.

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Sunday, 05 April 2020

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