How to Trade the S&P 500 Index Fund? - Trader's Toolkit - Fortrade Blog (2024)

In today's fast-paced financial landscape, there are endless stock options. Sifting through them and finding high-quality instruments can be challenging. The S&P 500 is one of those options you often hear about, but is it as safe as they say?

Note: Fortrade offers the ability to trade the price changes of instruments with CFDs and NOT to buy/sell ownership of instruments themselves. All the information in this blog is purely educational and should NOT be considered advice.

The S&P 500 Index Fund Explained

The S&P 500 is a market index that tracks the performance of the top-performing 500 US companies.

This index is primarily driven by the so-called Magnificent Seven, the success or failures of which have a large impact on Wall Street. They are:

• Apple (AAPL)
• Amazon (AMZN)
• Microsoft (MSFT)
• Meta Platforms (META)
• Google parent Alphabet (GOOGL)
• Tesla (TSLA)
• Nvidia (NVDA)

While it's not possible to invest directly in this index, numerous exchange-traded funds (ETFs) and mutual funds replicate this benchmark.

An S&P 500 index fund mirrors the stocks listed on the S&P 500 and contains the same investments as the index itself, so they usually perform similarly to one another.

» Find out what the US Tech 100 index is

Getting Started With S&P 500 Index Fund Investment

The first step to any investment is defining investment goals. Solid goals are the base for investment plans, risk management, and potential adjustments down the line. To define them, start by thinking about:

1. Understanding how much you want to invest
2. Knowing your long-term financial objectives

The next step is selecting the right . You can start by comparing the available options and what each of them offers. Which one you'll choose is up to you and your goals, but here are a few popular choices:

• Vanguard S&P 500 ETF
• SPDR S&P 500 ETF Trust
• iShares Core S&P 500 ETF
• Fidelity 500 Index Fund (mutual fund)
• Schwab S&P 500 Index Fund (mutual fund)

Investing in the S&P 500 Index Fund—Step by Step

1. Open a trading account The first thing you need to do is open a brokerage account on your chosen trading platform.
2. Fund your account You will then need to deposit funds in your account to cover the cost of the trade. This includes both the principal plus commission fee, although some trading platforms may waive the commission.
3. Place your order Once you've selected an S&P 500 index fund, you can begin trading it by purchasing shares or trading in CFDs.

Note: Fortrade offers the ability to trade the price changes of instruments with CFDs and NOT to buy/sell ownership of instruments themselves. All the information in this text is purely educational and should NOT be considered advice.

Nervous about trading real money? Consider practicing with a demo account first that can give you real market experience without risking any capital.

The Performance of the S&P 500

Since its inception in 1957, the value of stocks in the S&P 500 index has shown consistent growth. Despite occasional setbacks, this stock index has maintained an upward trajectory, averaging around 5.85% per year.

For instance, had you invested $100 in 1965 and reinvested the dividends, that initial investment would now be valued at over $27,000.

The Risks

• Concentration risk: The index relies heavily on a few tech sector giants, raising concerns about overreliance on their performance.

• Market volatility: The S&P 500's performance is subject to overall market fluctuations influenced by economic conditions, geopolitical events, and investor sentiment.

• Lack of diversification: The index predominantly consists of US-centric and large-cap companies, limiting exposure to other regions and sectors.

• Valuation concerns: Historically, the S&P 500 has traded at high price-to-earnings ratios, suggesting potentially inflated stock prices and leaving investors vulnerable to market corrections.

Ways to Potentially Mitigate These Risks

1. Dollar cost averaging (DCA): Could smooth out market volatility by consistently buying shares or units of an index fund at fixed intervals, regardless of the price. This means you acquire more shares when the price dips, potentially lowering your average cost per share in the long run.
2. Diversification: One of the ways of doing this is to acquire an ETF or a mutual fund that offers exposure outside of the index.
3. Controlling your emotions: Refrain from emotional buying during massive selloff events. History has shown that downturns are brief events, and markets tend to recover after correction. Instead of impulsive buying, focus on risk management and staying in line with your trading goals.

» Check out these 3 insights for the German DAX index

Harnessing the Power of S&P 500 Index Funds

The S&P 500 has been a trusted instrument for trading and investing. Over many decades, it has consistently produced good results.

Yet, depending on your investment goals and budget, an S&P 500 index fund may or may not be worth investing in. One way to try out this instrument could be through contracts for difference (CFD) trading.

As with any instrument, it is necessary to conduct thorough research and due diligence before actually investing. This way, you can be sure an S&P 500 would align with your investment plan.