Are you a new investor who is looking for ways to build wealth? More than 50 percent of households in the United States invest in some form in the stock market.
The decision to buy stocks, index funds, and other investments can be a great way to build wealth over a long period.
There are more than 3,600 companies with publicly traded United States. This means there’s no shortage of ways for you to invest in the stock market.
Many investors decide to invest in the S&P 500, via an Index Fund, as a way to diversify their portfolio and earn money for savings and retirement.
Read on to learn some of the basics about stocks and how to invest in S&P 500 today!
Buying stock is a great way to have an ownership stake in a business without buying a company altogether. Doing this can grow your saved money while you are at your day job. (It’s called “investing”)
A company’s stock usually trades (gets bought and sold) on a stock exchange. A couple common exchanges would be the New York Stock Exchange (NYSE) or the NASDAQ.
At an initial public offering (IPO), the stock is first made available for sale on an exchange to the public. From that day on, investors will buy and sell shares. For most stocks, there will be lots of ups and downs of the price over time.
Buying Index Funds
In the world of investing, diversification can be the difference between making money or suffering a big loss.
While buying individual stocks may be profitable, there can also be a higher amount of risk than investing in a wider range of investments.
Sometimes, instead of buying shares of stock on their own, an investor will decide to invest in an index fund to diversify and limit their risk.
What is an index fund and how is it different from owning stock?
An index fund a mutual fund whose holdings exactly match that of a stock index. Unlike mutual funds that are actively managed according to various strategies, the index fund requires very little management. (Consequently the management fees are usually much lower)
For example, 500 stocks are in the S&P 500. The index weighs these stocks determines the stock’s percentage in the fund based on its market capitalization. (The market capitalization of a stock is the price per share times the number of shares issued)
Buying shares in an S&P index fund is a great and easy way to invest in basket of stocks (made up of America’s top 500 companies), without having to own any of them individually in your portfolio.
Ok, So What is an Index Exactly?
Indexes are groups of stocks that are collectively tracked, for the purpose of measuring the performance of certain area of the market.
These could be a broad-based index that captures the entire market, such as the S&P 500 Index or Dow Jones Industrial Average (DJIA), or more specialized such as indexes that track a particular industry or segment.
Why Not Buy Individual Stocks?
Even the most seasoned investor may be unsure of how many stocks they should have in their portfolio, or which ones to buy? Being a diversified investor means not putting all of your eggs in one (or even ten) baskets.
This is not to say you can’t do well buying individual stocks, you certainly can. But I think you need to “invest” more time into understanding the markets and learning how to pick good stocks.
Or at the very least, subscribe to a service that helps you pick individual stocks. The one that I have used for many years is the Motley Fool Stock Advisor. They tell you what to buy, and even when to sell it. (which is just as important)
What’s the Easiest Way to Invest in the “S&P 500”?
The easiest way to invest in the S&P 500 basket of stocks would be to buy shares of the SPY ETF.
For clarity, and ETF is an Exchange Traded Fund. Somewhat recently, it become possible to have a mutual fund be sold just like a stock, on an exchange.
Just imagine the fund was a company, and that company had an IPO. Then the public could buy in to that Mutual Fund on a per share basis. Its actually a major advance for fund investing.
Making Good Investment Decisions
The best investment decision for you depends on a lot of factors regarding your specific situation. If you meet with an investment professional, they will speak with you about your investment goals and your time horizon.
It’s important that your financial advisor has a clear understanding of why you are investing and what you want to accomplish. Though most often, people speak to an advisor about investing for their retirement.
An advisor can give you guidance on how much you can, and should be, investing each year. They will also gauge your risk tolerance, so they put you in the most appropriate investment vehicles.
Learning how to invest in S&P 500 stocks and index funds is an important part of the process. Since its first introduction in 1957, the S&P 500 has been a measuring stick for the health of the stock market in the United States.
At Play Louder! I coach individuals and business owners, to help them realize their goals. Contact me today to set up a free chat so we can discuss how I can help you achieve financial independence!