What is the S&P 500? A friendly guide for investors

If you pay even a little attention to the news, you’ve probably heard the phrase “S&P 500.” But what does it actually mean, and why should you care? In plain language: the S&P 500 is one of the most widely followed stock market indexes, and it’s a great snapshot of how large U.S. companies are doing. Think of it as the financial world’s report card — updated constantly.

Quick TL;DR

The S&P 500 (Standard & Poor’s 500) tracks 500 of the largest publicly traded companies in the U.S. It’s market-cap weighted, which means bigger companies influence the index more. Investors use it to measure market performance and as a benchmark for many funds and portfolios.

How the S&P 500 actually works

Unlike a simple average, the S&P 500 is weighted by market capitalization — that’s the total value of a company’s outstanding shares (stock price × shares outstanding). Practically, this means Apple and Microsoft move the index more than a small company on the list. The index is maintained by a committee that decides which companies qualify.

Selection criteria in plain English

Not every big company gets in automatically. To make the S&P 500, a company generally must be U.S.-based, have a healthy market cap, be liquid (its shares trade regularly), and have positive earnings. The committee aims to represent the broad U.S. economy, so the list changes over time.

Why investors care about the S&P 500

There are three big reasons investors pay attention:

• Benchmarking: Many investors compare their returns to the S&P 500 to see if they’re beating the market.
• Diversification: Buying the whole index gives you exposure to 500 companies across many industries, which helps reduce company-specific risk.
• Accessibility: You can easily invest in the S&P 500 through index funds and ETFs that track the index.

Real-world example

Imagine the stock market as a fruit basket. The S&P 500 is like a basket filled mostly with apples, oranges, and bananas, but with more of the fruits that are more valuable. If apples (big tech companies) do well, the whole basket’s value rises more than if a less-popular fruit does well.

How to invest in the S&P 500

You don’t actually buy the index itself — instead you buy funds that track it. The most common vehicle is an ETF (exchange-traded fund) like the widely known ones that mirror the index’s returns. Mutual funds that track the S&P 500 are another option. Both are low-cost ways to get broad exposure.

If you’re new and want a solid starting point, check out our beginner’s guide to investing for practical steps on opening accounts and picking low-cost funds. And if you’d like to dive deeper into the philosophy behind passive investing, this page about index funds breaks things down simply.

S&P 500 vs. other indexes

People often compare the S&P 500 to the Dow Jones Industrial Average and the Nasdaq Composite. The Dow tracks 30 giant companies and is price-weighted (so higher-priced stocks move it more), while the Nasdaq is heavy on technology companies. The S&P 500 strikes a balance by being broad and market-cap weighted.

Things to watch out for

Although the S&P 500 gives broad exposure, it’s not risk-free. Because it’s market-cap weighted, the index can become concentrated in a few large companies — for example, a handful of tech giants might make up a big chunk of the index. That concentration can increase volatility if those companies slip.

Market cap matters

If you’re curious about how market value influences the index, see our quick glossary on market capitalization — it’s a small but useful concept that shapes what the S&P 500 looks like.

Performance and expectations

Historically, the S&P 500 has delivered solid long-term returns, but year-to-year performance can swing wildly. Expect ups and downs; the key for most investors is staying invested and avoiding panic-selling during market dips. As I always tell friends: focus on time in the market, not timing the market.

Common questions

Is the S&P 500 only for big investors?

No. Thanks to ETFs and low-minimum mutual funds, even investors with small balances can own a slice of the S&P 500.

Does it include international companies?

Generally no — the S&P 500 targets U.S.-listed companies. If you want global exposure, you’ll look at different indexes or global funds.

Bottom line

The S&P 500 is a simple, powerful tool: a broad, market-cap weighted index that tracks 500 large U.S. companies. It’s widely used as a benchmark and a foundation for diversified portfolios. If you’re building a long-term investing plan, understanding the S&P 500 — and how to invest in it through low-cost funds — is a smart first step.

Want to learn more? Start with the beginner’s guide, and consider adding a low-cost S&P 500 ETF to your watchlist as you develop your plan.