What Is the S&P 500?
The S&P 500 is a stock market index tracking 500 of the largest U.S. publicly traded companies. It represents roughly 80% of total U.S. market value and has delivered average annual returns of approximately 10% over the long term.
How the S&P 500 Works
The S&P 500 is a market-capitalization-weighted index, meaning larger companies like Apple, Microsoft, and Amazon have a greater influence on the index's performance than smaller companies. The index is maintained by S&P Dow Jones Indices and companies must meet specific criteria — including market capitalization, liquidity, and profitability requirements — to be included.
When people say "the market was up today," they are usually referring to the S&P 500. It is the most widely followed benchmark for U.S. stock market performance and serves as the standard against which most fund managers measure their results. You cannot invest directly in the index, but you can buy S&P 500 index funds or ETFs that replicate its performance at very low cost.
Why the S&P 500 Matters for Your Financial Goals
The S&P 500 has delivered average annual returns of approximately 10% over the long term (about 7% after inflation). This track record makes S&P 500 index funds one of the most popular core holdings for long-term investors. A single S&P 500 fund gives you exposure to 500 of America's largest companies across every major industry.
Warren Buffett has famously stated that most investors would be better off simply buying and holding an S&P 500 index fund rather than trying to pick individual stocks or hire fund managers. For many investors, an S&P 500 index fund is the simplest and most effective foundation for a long-term portfolio.
Key Takeaway
The S&P 500 is the benchmark for U.S. stock market performance. Investing in a low-cost S&P 500 index fund is one of the simplest and most proven long-term strategies.
Related Terms
Index Fund
An index fund is a type of mutual fund or ETF designed to replicate the performance of a specific market index, like the S&P 500. Rather than trying to beat the market, index funds aim to match it — with low fees and broad diversification.
ETF
An ETF (Exchange-Traded Fund) is an investment fund that holds a collection of assets — stocks, bonds, or commodities — and trades on a stock exchange like an individual stock. ETFs offer the diversification of a mutual fund with the flexibility and real-time pricing of stock trading.
P/E Ratio
The price-to-earnings (P/E) ratio is calculated by dividing a stock's current price by its earnings per share. A P/E of 20 means investors pay $20 for every $1 of earnings. The historical S&P 500 average P/E is roughly 15-17.