What is the S&P 500? A beginner’s overview

If you’re learning about investing, you’ve probably heard about the S&P 500, but what is it exactly? The S&P 500 is a stock market index that tracks the 500 largest U.S. companies and their performance in the stock market. Because it monitors numerous companies, including those that may significantly impact the American economy, many see its performance as a measure of the health of the U.S. stock market and economy.

What makes up the S&P 500?

Number of companies

While the S&P 500 is made up of the 500 largest publicly traded companies in the U.S., sometimes the actual number of stocks you see may be slightly different. For example, Google has two types of shares, and both are included in the S&P 500, even though it only counts as one company. 

Market capitalization

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Companies in the S&P 500 don’t carry equal weight. Instead, their influence is based on market capitalization, which is the total value of all a company’s shares (the share price multiplied by the number of shares). In simple terms, the bigger the company, the bigger its impact on the index.

This also means that when you invest in the S&P 500, your money is split across these 500 companies in proportion to their size. For example, if Apple makes up 10% of the index, then 10% of your investment goes to Apple.

Who decides which companies are in the S&P 500?

The S&P 500 is managed by S&P Dow Jones Indices, which is majority-owned by S&P Global. They set the rules for which companies are included, based on factors like:

• A U.S.-based corporation that has common stock and is publicly traded

• Minimum market capitalization, which is currently $20.5 billion

• Positive earnings in the past quarter and the previous four quarters combined

The S&P typically reviews the list of companies every quarter to determine if any companies need to be added or removed from the index and to update each company’s share in the overall index based on the latest financials. 

For example, as of July 2025, the following changes have been made in the S&P 500 index so far this year:

• Added: Block, The Trade Desk, Coinbase Global, DoorDash, TKO Group Holdings, Williams-Sonoma, Expand Energy

• Removed: Hess, ANSYS, Discover Financial Services, BorgWarner, Teleflex, Celanese, FMC

How to invest in the S&P 500

You can’t buy shares of the S&P 500 itself. Instead, you purchase shares of an index fund or exchange-traded fund (ETF)that tracks the index. These funds hold all the same companies in the S&P 500, so when you buy shares of the fund, you’re buying a slice of the whole index in the same proportions.

To invest, you need to open a brokerage account or retirement account, deposit money into the account, and choose which index funds or ETFs you would like to purchase. 

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How has the S&P 500 performed?

How the S&P 500 (or any investment) has performed in the past does not guarantee it will perform the same in the future, but it can be helpful to know the track record of any investment. The S&P 500 index has delivered an average annual return of over 10% since 1957. 

But that’s an average. Some years, the S&P 500 has returned over 30%, but it has also lost just as much in other years. Historically, though, the S&P 500 has had a positive return roughly three out of every four years since its creation. 

Things to keep in mind

As with any investment, there are pros and cons. How each could affect you depends on your personal situation, including how long you’re going to invest (time horizon), your risk tolerance, and your goals. Here are a few things to consider when investing in the S&P 500:

• Company concentration: The index has been dominated by a few large tech companies that hold a majority of the shares, so it may not be as evenly diversified among companies as it appears. 

• Sector concentration: In addition to the high concentration of a few companies, this also means that the S&P 500 can be over-invested in one sector, such as tech, compared to the rest of the sectors in the economy. 

• Company size: Depending on your investment objectives, you might consider investing in smaller and mid-sized companies, in addition to other asset classes, such as bonds, real estate, and cryptocurrencies. The S&P 500 consists primarily of large companies, commonly referred to as large caps.

• Geography: The S&P 500 only consists of U.S. companies, and you may decide to consider investing in international companies. 

These factors don’t mean you should or shouldn’t invest in an S&P 500 index fund or ETF. But they’re considerations that may help determine how much of your portfolio to invest in the index (if at all) compared to other investments. 

A natural first step toward investing

The S&P 500 is one of the most widely followed stock market indexes in the world, offering a snapshot of how major U.S. companies—and by extension, the U.S. economy—are performing. For beginners, index funds or ETFs can be a straightforward approach to starting an investment portfolio. However, even though the S&P 500 has a strong long-term track record, it also carries risk, particularly due to its concentration in specific companies and sectors. For most beginners, though, learning about the S&P 500 is a natural first step toward understanding investing.

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