A Simple Guide To Scottrade's S&P 500 Investment

The S&P 500 is a stock market index that tracks the performance of 500 of the largest publicly-traded U.S. companies, including Apple, Amazon, and Microsoft. It is considered a benchmark for the performance of the U.S. stock market and provides a gauge of the overall health of the economy. To invest in the S&P 500, individuals can choose to invest in an index fund or exchange-traded fund (ETF) that follows the index. Scottrade, now known as TD Ameritrade, is an online brokerage platform that offers various investment options, including the ability to invest in the S&P 500. Here is a step-by-step guide on how to invest in the S&P 500 using Scottrade:

1. Open an Account: If you don't already have an account with Scottrade, you will need to sign up and create an account. This process typically involves providing personal information, such as your name, address, and social security number. You may also need to fund your account with an initial deposit.

2. Research S&P 500 Investment Options: Scottrade offers a variety of investment options, including mutual funds and ETFs that track the S&P 500. Compare the available funds based on their expense ratios, performance, and other relevant factors to make an informed decision.

3. Place a Trade: Once you have selected the S&P 500 investment option that aligns with your financial goals and risk tolerance, you can place a trade through your Scottrade account. Specify the ticker symbol of the fund and the number of shares you wish to purchase.

4. Monitor and Manage Your Investment: After purchasing shares of the S&P 500 fund, you can monitor its performance over time through your Scottrade account. Depending on your investment strategy, you may choose to buy more shares or sell a portion of your holdings.

Remember to consider your financial goals, risk tolerance, and conduct your own research or consult with a financial advisor before making any investment decisions.

Opening an investment account

When choosing a broker, consider factors such as the types of investment accounts they offer (e.g., taxable brokerage account, 401(k), IRA), the fees they charge, and the investment options available. Some brokers may offer commission-free trading or low minimum deposit requirements. It is also important to ensure that the broker you choose provides access to the S&P 500 funds or ETFs you are interested in.

Once you have selected a broker, you can open an account by providing your personal information, such as your name, contact information, and Social Security number. You may also need to choose the type of account you want to open and fund the account with a minimum deposit.

After your account is open, you can start investing in the S&P 500 by purchasing individual stocks, index funds, or ETFs that track the S&P 500 index. It is recommended to consider factors such as expense ratios, sales loads, and the performance of the fund when making your investment decisions.

Buying individual stocks

You can buy individual stocks of companies in the S&P 500. However, this option can be expensive and tedious. To buy just one share of the 10 largest companies in the S&P 500, for example, could cost over $8,000. It would also be a management nightmare for an individual investor to accurately duplicate the index weighting and keep it on track as the market changes day-to-day.

If you want to buy individual stocks, you'll need to open a brokerage account. Online trading platforms like Ally Invest and E*TRADE offer commission-free trading. Charles Schwab offers fractional shares of any stock on the S&P 500, with rates as low as $5 a slice. SoFi Invest also lets you buy fractional shares for as little as $5 with no commission fees.

Buying into S&P 500 index funds or ETFs

The S&P 500 is a stock market index that tracks the performance of 500 of the largest U.S. public companies by market capitalization. It is considered a bellwether for the American stock market and a good indicator of the overall health of the U.S. stock market.

You cannot directly invest in the S&P 500 index itself, but you can buy individual stocks of companies in the S&P 500 or invest in an S&P 500 index fund or ETF. Index funds and ETFs are investment funds that aim to replicate the returns of the S&P 500 by tracking it, offering investors exposure to the index's companies.

• Find your S&P 500 index fund: Compare the expense ratios, sales loads, and other fees of different S&P 500 index funds to find the most cost-effective option. Some popular S&P 500 index funds include the Vanguard 500 Index Fund Admiral Shares (VFIAX) and the Fidelity 500 Index Fund (FXAIX).
• Open an investing account: You will need an investing account such as a 401(k), an IRA, or a regular taxable brokerage account to purchase S&P 500 index funds or ETFs. Look for a broker that offers low fees and the ability to trade your desired fund without a transaction fee.
• Determine your investment amount: Figure out how much you can afford to invest and move that money into your brokerage account. Consider setting up regular transfers to your brokerage account or investing a set amount from each paycheck.
• Buy the index fund: Go to your broker's website and place a trade for the desired number of shares of your chosen S&P 500 index fund. You can also set up an investing schedule to buy the index fund on a recurring basis, taking advantage of dollar-cost averaging.

Keep in mind that S&P 500 index funds and ETFs have slightly different characteristics. ETFs trade like stocks and can be bought and sold throughout the day, while index funds can only be bought and sold at the end of each trading day. Additionally, S&P 500 index funds tend to have slightly higher fees than ETFs.

Advantages of investing in the S&P 500

Investing in the S&P 500 has several advantages. Here are some key benefits:

• Exposure to Dynamic Companies: The S&P 500 includes some of the world's most dynamic and prominent companies, such as Apple, Amazon, Microsoft, and Johnson & Johnson. Investing in the index provides access to these industry leaders.
• Consistent Long-Term Returns: Over time, the S&P 500 has consistently performed well, offering stable and reliable returns for long-term investors.
• Simplified Analysis: By investing in an ETF or index fund, individuals can avoid the intricate analysis and stock-picking process, making it a more straightforward investment strategy.
• Core Holding Potential: S&P 500 index funds and ETFs are liquid and trade with tight bid-ask spreads, making them ideal as core holdings for a diverse range of investment portfolios.
• Broad Market Representation: The S&P 500 captures a significant portion of the U.S. stock market's value, providing a broad view of the economic health of the country and its large-cap companies.
• Benchmarking and Comparison: Investors and analysts use the S&P 500 as a benchmark to judge the overall economy and compare the performance of their portfolios.

Disadvantages of investing in the S&P 500

While the S&P 500 is one of the most renowned stock market indices globally, it does come with its own set of disadvantages. Here are some of the drawbacks of investing in the S&P 500:

Market Volatility

The S&P 500 has historically shown long-term growth, but it is not immune to market volatility. Periods of market downturns can result in significant declines in the index value. Investors need to have a long-term investment horizon and be able to withstand short-term market fluctuations.

Lack of Individual Stock Selection

Investing in the S&P 500 means giving up control over individual stock selection. While this provides diversification benefits, it also means potentially missing out on gains from individual stocks that may outperform the broader market. Investors seeking more control over their portfolio may prefer a strategy that includes individual stock selection.

Concentration in U.S. Stocks

The S&P 500 Index primarily focuses on U.S.-based companies, which may result in a lack of exposure to international markets. This limits the diversification benefits that could be gained from global investments. Investors looking for broader international exposure may need to explore additional investment options.

Inclusion of Underperforming Stocks

While the S&P 500 committee periodically reviews the index constituents, there may be instances where underperforming stocks remain in the index for a certain period, impacting its overall performance.

Limited Exposure to Mid- and Small-Cap Stocks

The S&P 500 is dominated by large-cap companies, with its biggest constituents accounting for a significant portion of the index. As a result, the index has limited exposure to small-cap and mid-cap stocks, which may have higher growth potential.

Inherent Risks of Equity Investing

The S&P 500, being an equity investment, carries inherent risks such as volatility and downside risk. Newer investors may find it challenging to tolerate such volatility.

Inability to Beat the Market

S&P 500 index funds are designed to follow the market and are, therefore, unable to outperform it. For investors seeking to maximise their returns and beat the market, individual stocks or actively managed mutual funds may be a better option.

Lack of Customisation

Investors in the S&P 500 index have no control over the individual stocks in the fund and are unable to customise their investments. If there are specific companies or sectors an investor wishes to avoid or target, they may find the lack of customisation in the S&P 500 restrictive.

Frequently asked questions