What is the S&P 500? A Beginner’s Guide to the Market

The S&P 500 (Standard & Poor’s 500) is a stock market index that tracks the performance of the 500 largest publicly traded companies in the United States.

When watching the news, you might hear that the “market” is up. The S&P 500 is the market. It is also known as a benchmark.

The S&P 500 accounts for approximately 80% of the United States’ market capitalization.

How Does the S&P 500 Work?

Selection Criteria

Several selection criteria must be met to be included in the S&P 500.

Domicile
- Located in the United States
Security Filing Type
- Must file and report certain forms such as: 10-K, 10-Q, and 8-K.
Exchange Listing
- Have a listing on a U.S. exchange such as the New York Stock Exchange or Nasdaq.
Organizational Structure and Share Type
- Must be a corporation and offer common stock.

Market Cap Weighting

Companies must have a market capitalization of $22.7 billion or more.

Market Cap = Share Price x Number of Shares.

The market cap of a company is the total value of all its shares.

The S&P 500 is a market cap weighted index.

This means that companies with larger market capitalizations make up a larger part of the index.

For example, a $25 billion company doesn’t have as much of an impact as a $1 trillion company.

What Companies Are in the S&P 500?

The Magnificent Seven

The Magnificent Seven are seven companies whose performance has been so strong that they make up a significant portion of the S&P 500 by market cap.

As of December 2025, their combined market cap is worth around $22 trillion.

The Magnificent Seven include:

Nvidia (NVDA): $4.405 trillion
Apple (AAPL): $4.245 trillion
Alphabet (GOOG): $3.808 trillion
Microsoft (MSFT): $3.652 trillion
Amazon (AMZN): $2.519 trillion
Meta Platforms (META): $1.616 trillion
Tesla (TSLA): $1.417 trillion

Treemap chart of the Mag 7 weighting in the S&P 500 versus the rest of the S&P 493 as of December 2025.

Sector Breakdown

A treemap chart of the sector weightings in the S&P 500 as of December 2025.

Communication Services: 10.10%
Consumer Discretionary: 10.50%
Consumer Staples: 4.70%
Energy: 2.80%
Financials: 12.90%
Health Care: 9.00%
Industrials: 8.10%
Technology: 36.10%
Materials: 1.70%
Real Estate: 1.80%
Utilities: 2.30%

S&P 500 vs. The Dow Jones: What’s the Difference?

The Dow Jones Industrial Average

The Dow Jones is a stock market index that tracks the performance of 30 “blue-chip” companies in the United States.

It’s older than the S&P 500 and has some unique differences.

The Dow Jones uses price-weighted capitalization. This means that the companies that have a higher trading price have more influence than companies that trade at a lower price.
- Goldman Sachs (GS) and Caterpillar (CAT) have higher weightings than Microsoft (MSFT) even though Microsoft is a much larger company.
Doesn’t contain any companies in the utilities or real estate sectors.
Represents about 25% of the total value of the U.S. stock market.

The S&P 500

Weighted by market capitalization instead of trading price.
Contains more companies and represents more sectors.
Represents about 80% of the total value of the U.S. stock market.

Verdict

Long-term investors typically choose to invest in the S&P 500 instead of the Dow Jones.

It uses market cap weighting, which allows the best companies to make up more of the index.

There is more diversification because it includes 500 companies and all the major sectors.

Historical Returns: How Much Money Does It Make?

The Average Return

There’s different ways to measure the average return of the S&P 500.

I’m going to use the returns of the large cap asset class on Portfolio Visualizer.

It’s almost identical to the S&P 500 and provides more information because the average person wasn’t able to invest into a S&P 500 ETF until 1993.

From 1972 – present, the S&P 500’s average return was 10.90%.

Best Year: 37.45% (1995)

Worst Year: -37.02% (2008)

Maximum Drawdown: -50.97% (Nov. 2007 – Feb. 2009)

Inflation Adjusted

The S&P 500’s average return of 10.90% sounds good, but that’s not including inflation.

Inflation (CPI) increased at about 3.94% per year over the same period of time.

The S&P 500’s “real” average return was about 6.96% per year.

How to Invest in the S&P 500

You Can’t Buy The Index

If you search for the S&P 500 online, you’ll likely see the index which currently has a price around 6,800.

You can’t invest your money right into the index though.

Instead, there are ETFs that track the index.

The Solution (ETFs)

Major asset managers like Vanguard and Blackrock (BLK) offer ETFs that track the S&P 500.

These ETFs have the same companies and weightings as the S&P 500.

When the S&P 500 rebalances each quarter, so do the ETFs.

You are investing into ETFs that track the S&P 500.

The Big Three

The Big Three refer to the most well know ETFs that track the S&P 500.

They include:

SPY (SPDR S&P 500 ETF Trust)
- Issuer: State Street Global Advisors
VOO (Vanguard S&P 500 ETF)
- Issuer: Vanguard
IVV (iShares Core S&P 500 ETF)
- Issuer: BlackRock (iShares)

Pros and Cons of the S&P 500

Pros

Historical Performance
- 10.90% annual average return since 1972. Very difficult for professionals to “beat” the index
Market Cap Weighted
- Index removes companies that are performing poorly and replaces them with growing companies. No need to pick and choose stocks to invest in.
Low Cost
- Low fees save investors thousands of dollars in the long run.

Cons

Concentration Risk
- Because the S&P 500 is market cap weighted, there is a risk of being too exposed to a few companies.
- The Magnificent Seven account for almost 39% of the market. The technology sector is 36%.
- If these stocks perform poorly, then they drag the rest of the index down with them.
No Small Caps
- Companies have to be worth more than $22.7 billion to be included in the S&P 500. There’s no exposure to companies smaller than this.
High Valuations
- The S&P 500 buys companies regardless of the price they are trading at.
- This can increase risk during potential market bubbles.
No International Diversification
- The S&P 500 is a bet on the United States.
- There’s no guarantee that the United States will outperform international markets in the future.

FAQ

What is the S&P 500?

The S&P 500 is a stock market index that tracks the performance of 500 of the largest publicly traded companies in the United States.

How Do I Invest in the S&P 500?

You buy an ETF that tracks the S&P 500. The most popular S&P 500 ETFs include: SPY (State Street), VOO (Vanguard), and IVV (iShares). You can buy these ETFs through any brokerage such as Fidelity, Robinhood, or Schwab.

What is the Average Annual Return of the S&P 500?

Since 1972, the S&P 500 has returned 10.90% per year on average before inflation. However, its best year was about 37% and its worst year was about -37%. It also had a maximum drawdown of almost -51% during the 2008 financial crisis.

How Much Money Do I Need to Start Investing in the S&P 500?

You can start investing with as little as $1 if your brokerage offers “fractional shares”. Most modern brokerages allow you to invest dollar amounts instead of buying individual shares.

Does the S&P 500 Pay Dividends?

Yes. The companies inside of the index pay dividends. When you own a S&P 500 ETF, the fund collects the dividends from all 500 companies and pays them out to you on a quarterly basis. You can decide to receive this as cash or reinvest it to buy more shares.

The Bottom Line

The S&P 500 is one of the most followed indices for the U.S. stock market. It includes the 500 largest companies in the United States. Investing in the S&P 500 is a bet that American companies will continue to grow and profit.