Investing in S&P 500 Stocks

O nce you’ve figured out that investing is the next move for you, you may quickly find that there are a number of paths you might take to get to your ultimate financial goal. It can be overwhelming, so start slowly by educating yourself about the different stocks and investment opportunities. One of the most popular index funds is the S&P 500. If you have an IRA or employer-funded 401(k), you may already be invested in an S&P 500 index fund without even realizing it.

Learn more about S&P 500 stocks, including the top companies that are part of the index, the advantages and risks of investing in it, and how to begin.

What Are S & P 500 Stocks?

Image via Flickr by ota_photos

The S&P 500, which stands for Standard & Poor 500, is an index fund that’s composed of 500 companies that trade 505 common stocks on American stock exchanges. When people refer to the stock market in broader terms, they are probably referring to the S&P 500. The S&P 500 makes it easy to invest in all of the 500 companies at one time.

To be a part of the fund, American companies must be a large-cap company with a market cap that’s at least $8.2 billion. The companies that make up the S&P 500 account for approximately 80% of the equity market capitalization, making them the largest stocks in the United States.

Most of these companies are highly recognizable household names and blue-chip companies with proven success. All of these companies exist in the market by market cap so the larger the stock, the more impact it has on the index when considering both the daily market and the performance of the market over time. If you’re going to invest in an S&P 500, it’s important to know the top 10 companies that are a part of it because it’s these companies that determine how the overall market will do.

What Companies Are Part of the S&P 500?

When it comes to the listing of the stocks that make up the S&P 500, that part is chosen by a committee. The companies that make the list don’t have to be the largest companies in the U.S.; rather, the committee looks at figures like liquidity, market capitalization, the sector of the stock, and more to determine if a company qualifies and, if so, where they place in the list.

There are the top 10 stocks in the S&P 500, ranging in index weighting:

1. Microsoft Corp. (MSFT)

Index weight: 6%

Microsoft is a company that most people are familiar with because we have purchased or at least used their products since computers became a thing. Microsoft is popular for personal and enterprise use because of its efficient Windows operating system and complete suite of products, including cloud services.

2. Apple Inc. (AAPL)

Index weight: 5.8%

Apple produces and sells hardware, software, cloud services, and more. Some of their most popular products are the Apple iPhone, iPad, Mac computers, Apple Music, and Apple TV.

3. Amazon.com Inc. (AMZN)

Index weight: 4.5%

Known for its wide variety of products that can ship fast through their Prime service, Amazon is a popular online retailer that’s also in charge of Whole Foods grocery stores.

4. Facebook Inc. (FB)

Index weight: 2.1%

Facebook is the largest social network that also owns other social networking apps such as Instagram and WhatsApp. Facebook also owns Oculus, the company that makes virtual reality equipment.

5. Alphabet Inc. Class A Shares (GOOGL)

Index weight: 1.7%

Most people use Google as their primary search engine, but you’re also probably familiar with Gmail, YouTube, and Google My Business, among other products. Alphabet is Google’s parent company. Alphabet actually offers two different stocks, one with voting rights and one without. The Class A shares have a higher value, associated price, and comes with voting rights.

6. Alphabet Inc. Class C Shares (GOOG)

Index weight: 1.6%

The Class C shares of Alphabet are lower in price than the Class A shares and do not come with voting rights.

7. Johnson & Johnson (JNJ)

Index weight: 1.5%

Johnson and Johnson is a medical company that specializes in consumer products related to health and wellness, including hygiene products and pharmaceuticals. There are a lot of notable brands under the Johnson & Johnson label, including Neutrogena and Band-Aid.

8. Berkshire Hathaway Inc. (BRK.B)

Index weight: 1.4%

Compared to the other companies that make up the top 10 list, Berkshire Hathaway Inc. is probably less recognized. It’s actually a holding company for Warren Buffet’s investments and includes more popular companies such as Dairy Queen, Geico, and many businesses in the energy and manufacturing sectors. Berkshire Hathaway is composed of so many equities that it’s possible for the value of the stock to fluctuate depending on how the shares do.

9. Visa Inc. (V)

Index weight: 1.3%

Visa is one of the largest digital payment companies in the world. They provide debit and credit cards to consumers and business owners, helping to manage the transactions that exist between them and financial institutions and merchants.

10. Procter & Gamble

Index weight: 1.2%

Similar to Johnson & Johnson, Procter & Gamble is a company that sells products in the personal and home care sectors. Procter & Gamble is made up of more than 65 brands, including Crest, Tide, and Pampers, and sells products like soap, razors, and detergent.

Advantages and Risks of the S&P 500

As with any investment, there are advantages and risks of investing in the S&P 500 and it’s important to know them when you’re thinking of investing.

Advantages of the S&P 500

Investing in the S&P 500 comes with a handful of really appealing advantages such as:

  • Convenience: When you invest in an S&P 500 index fund, you are investing in all 500 companies in a singular transaction. This means you won’t have to invest individually, which is a big undertaking and a move that experts wouldn’t typically recommend.
  • Diversification: You are automatically diversifying your portfolio by investing in an S&P 500 index fund because of the sheer number of companies that are a part of it.
  • Steady growth: No matter your investment goals, steady growth is a good thing. If you want to have the greatest chance of earning large gains from your investments, the steady option may be too slow for you. However, if you would rather feel more secure in your investments, investing in S&P 500 funds is a safer bet.
  • Low risk: The companies that comprise the S&P 500 are well-known companies with billions of dollars. They are traded often and have been around for a long while. Because of all this, there is low risk of losing your money.

Risks of the S&P 500

Although the risks are low, here are a couple to keep in mind:

  • Incomplete diversification: With an S&P 500 index fund, you are diversifying, but only among American companies. You aren’t diversifying the types of securities because these companies are only selling stocks. If you want to completely diversify, you might want to consider bonds and real estate investments in addition to your investment in the S&P 500.
  • Value swings: Being all United States-based companies also means that the value and success of these stocks are dependent on the U.S. market. Even though the risk is low and gains are steady, the value of your investment has the potential to dramatically increase or decrease over time.

How to Invest in the S&P 500

Before 1975, you had to buy every individual stock for all companies that are represented in the S&P 500, but then S&P 500 index funds were born. Now, you can invest in all of the stocks that are a part of the index with just one purchase.

Follow these steps to invest in the S&P 500:

1. Open a Personal Investment Account

You’ll first need an account before you can handle transactions for the purchase of stocks. Your account can be either a traditional or Roth IRA, an employer-sponsored 401(k), or another account that specifically acts as a brokerage account for this purpose.

When you’re opening a brokerage account, make sure to look at the associated fees for buying and selling shares. Brokerage fees can vary so if two you’re deciding between have similar track records, then the fees they charge may help you make your determination.

2. Decide If You Want to Purchase Mutual Funds or EFTs

When purchasing your index fund, you’ll want to choose to buy it as mutual funds or EFTs. Here are the differences between the two:

  • Mutual funds: If you intend to hold on to your investment for a while, consider mutual funds. They trade only once per day after the market closes. Depending on the mutual fund, you may have to invest a minimum dollar amount and be invested for a certain length of time or you may face penalties.
  • ETFs: In contrast, the price of EFTs change throughout the day. There is also no minimum investment amount or period of time. In most cases, EFTs are less expensive to get into as well because they are associated with low or no fees.

3. Compare fees

Each index fund will cost you, and it’s important to compare fees to make sure the fund you’re selecting is in line with how much you’re willing to pay. Especially if you are starting slow and not investing a lot, you don’t want your budget taken up by unnecessary costs and fees when a comparable fund will cost you less.

4. Invest

Decide on the price you want to pay, how many shares you want to own, and which S&P 500 index fund you want to invest in, then work with a broker to complete the transaction or enter your purchase in on online investment platform.

Armed with this knowledge of S&P 500 stocks, it’s time to take control of your future and start investing.