How to Invest in the S&P;

One type of Standard and Poor's stock market index is the widely recognized S&P 500. The S&P 500 contains 500 large cap U.S. companies. Since the stocks that make up the S&P 500 cover such a large segment of the American equity market, the index is generally a credible indicator of the performance of large U.S. firms and the economy as a whole. There are several ways you can invest in the S&P 500.

Invest in a mutual fund that attempts to mimic the return of the S&P 500. Many mutual fund families have a fund that holds most, if not all, of the S&P 500 stocks. Others hold some, but not all stocks of the S&P 500 or other Standard and Poor's market indices.

Get into an exchange-traded fund (ETF) that aims to mirror S&P 500 returns. The big difference between a mutual fund and an ETF is that you can trade ETFs throughout the day -- since they trade on an exchange -- as well as sell them short. You can only buy and sell a mutual fund at its closing price -- its net asset value -- at the end of the trading day.

Purchase the stocks of the S&P 500. Of course, you'll be hard-pressed to buy all 500. Not only does Standard and Poor's drop some and add others from time to time, but it would take quite a large operation -- like a mutual fund or ETF -- to achieve such a lofty task. You can, however, hold individual stocks that are key S&P 500 players. For example, if you own Exxon, Apple, Microsoft, IBM, Proctor and Gamble, Johnson & Johnson, GE, AT&T, Chevron and JP Morgan Chase, you own the top ten components, by market capitalization, of the S&P 500, as of the close of the trading day on November 30, 2010.

Tips

  • A whole host of indices are based on Standard and Poor's stocks. Many contain stocks that focus on particular niches, such as a particular country or sector of the economy. You can find mutual funds and ETFs that attempt to mimic the returns of many of these individual indices.
  • Use mutual fund and ETF screeners, such as the ones Morningstar provides at its website, to narrow the playing field and find mutual funds and ETFs that hold S&P; stocks.
 

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