What Is the S&P 500? A Plain Language Guide for Everyday Investors

If you ever turn on the news and hear that “the market was up today”, they’re probably talking about the S&P 500.

Most people have probably heard that name before, but how many actually know what it is, how it works, or whether or not it’s a good investment?

This article will break it all down. I’ll answer what the S&P 500 is, how companies get into it, its historical returns, and a few things other financial sites don’t discuss.

Of course, none of this is financial advise.

What Is the S&P 500?

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

It’s a general representation of how big American businesses are performing.

It represents about 80% of the total value of all publicly traded companies in the United States. So while there are thousands of publicly traded companies in the US, the S&P 500 captures the majority of the market. That’s why it’s become a default measure of how the US stock market is performing, and why it’s referred to as “the market”.

How Does the S&P 500 Work?

Not just any company can get into the S&P 500. There’s a specific set of requirements a company has to meet before it is even considered for inclusion.

The Requirements to Get In

First, the company has to be based in the United States and listed on a major US exchange like the New York Stock Exchange or Nasdaq.

Second, it has to be structured as a corporation offering common stock and file the standard financial reports that public companies are required to submit (things like 10-K annual reports and 10-Q quarterly reports).

Third, the company needs a market capitalization of at least $22.7 billion. Market cap is just the total value of all of a company’s shares combined. You calculate it by multiplying the share price by the number of shares outstanding.

For example, if a company has 10 million shares and each share is worth $50, the market cap is $500 million. That company would not make the cut for the S&P 500. But a company with 1 billion shares at $50 each has a market cap of $50 billion and would easily qualify.

Market Cap Weighting (Why Some Companies Matter More Than Others)

However, not all companies in the S&P 500 are treated equally.

The S&P 500 is what is called a market cap weighted index. That means bigger companies have a bigger impact on the index’s overall performance.

For example, if a company that’s worth $3 trillion loses 20% of its value in one day, the S&P 500 would be dragged down with it. If a company worth $30 billion loses 20% of its value in one day, it might not even make the S&P 500 budge.

This is worth understanding because it means the S&P 500 is not as diversified as it might sound. We will come back to this in the pros and cons section.

The Magnificent Seven

Within the S&P 500, there is a group of seven companies whose size and performance have become so dominant that they have their own nickname: the Magnificent Seven.

As of April 2026, these seven companies had a combined market cap of around $19 trillion. Here is the list:

Together, these seven companies make up nearly 33% of the entire S&P 500. That means when you buy an S&P 500 ETF, three out of every ten dollars you invest is going into just these seven companies. That is a level of concentration that is worth being aware of.

How the S&P 500 Is Broken Down by Sector

Beyond the Magnificent Seven, here is how the full index breaks down by industry sector as of late 2025:

Technology alone makes up over a third of the entire index. That is a significant concentration in one sector, and it makes you question whether the S&P 500 is truly diversified or not.

For context on how the real estate sector specifically has performed as an investment, check out our article on XLRE returns from 2016 to 2025.

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

If you have been following financial news for any length of time, you have probably heard of the Dow Jones too. So what is the difference between the two?

The Dow Jones Industrial Average

The Dow Jones tracks just 30 large US companies, sometimes called “blue-chip” companies. It is actually older than the S&P 500 and has been around since 1896.

The Dow Jones is price-weighted rather than market cap weighted. That means companies with a higher share price have more influence over the index, regardless of how large the company actually is.

Here is a concrete example of why that is a little strange. Goldman Sachs and Caterpillar both have higher weightings in the Dow Jones than Microsoft does, even though Microsoft is a larger company. That’s because Microsoft’s share price is lower than theirs.

The Dow Jones also does not include any companies in the utilities or real estate sectors, and it only represents about 25% of the total US stock market compared to the S&P 500’s 80%.

Which One Should You Pay Attention To?

The S&P 500 is generally considered the more useful benchmark. It covers more companies, more sectors, and uses market cap weighting which lets the best-performing companies naturally grow their influence in the index over time. That is why most index funds are built around the S&P 500 rather than the Dow Jones.

Historical Returns: How Much Has the S&P 500 Actually Made?

Now for the part most people come here for. What has the S&P 500 actually returned over time?

For this analysis, we are using the large cap asset class data from Portfolio Visualizer, which is almost identical to the S&P 500 and gives us a longer history to work with since the average person could not invest in an S&P 500 ETF until 1993.

From 1972 to present, the S&P 500 has averaged a return of about 10.90% per year.

That 10.90% average annual return is genuinely impressive over a long time frame. But there is an important catch that most financial websites breeze past. That number does not account for inflation.

Does the S&P 500 Beat Inflation?

Inflation matters because it erodes the purchasing power of your money over time. Even if your investment goes up in dollar terms, if prices are rising faster than your returns, you are actually losing ground in real terms.

For a deeper look at how inflation works and why it affects everyday people, check out our article on the M2 money supply and what it does to your dollar.

From 1972 to present, the Consumer Price Index (CPI) grew at about 3.94% per year. That is the official measure of inflation. So when you subtract that from the S&P 500’s 10.90% average return, you get a real return of about 6.96% per year.

That’s still a good return, but it’s lower than the 10% – 11% figure that is usually quoted.

Beyond CPI, it is also worth comparing the S&P 500 to M2 money supply growth, which grew at about 6.63% per year over the same period. If you take the average S&P 500 return of 10.90% and subtract it by 6.63%, you get 4.27%. Meaning that your real wealth grew at about 4.27% over that time period.

This paints a more complete picture, rather than just knowing that the S&P 500 had a nominal return of about 11% per year.

How to Invest in the S&P 500

You Cannot Buy the Index Directly

Here is something that trips up a lot of beginners. If you search for the S&P 500 online you will see a price (currently around 6,500 as of April 2026) but you can’t actually buy the index itself. It’s just a number that tracks performance. It’s not something you can purchase directly.

What you can buy are ETFs (Exchange Traded Funds) that are designed to mirror the S&P 500 as closely as possible. These ETFs hold the same companies in the same proportions as the index and update automatically when the S&P 500 rebalances each quarter.

The Three Most Popular S&P 500 ETFs

There are three ETFs that most people use when they want to invest in the S&P 500. They are sometimes called the Big Three:

All three track the same index and hold essentially the same companies. The main differences come down to fees and slight variations in how they handle dividend reinvestment. For most long-term investors, any of the three works well. VOO and IVV tend to have slightly lower expense ratios than SPY, which matters more over longer time horizons.

Pros and Cons of Investing in the S&P 500

Like any investment, the S&P 500 has real strengths and real weaknesses. Here is an honest look at both.

The Pros

Strong historical performance. A 10.90% average annual return since 1972 is genuinely hard to beat, especially when you consider that the vast majority of professional fund managers fail to outperform the index over long periods of time. Most people would do better just buying the index than paying someone to try to beat it.

Self-cleaning. Because the S&P 500 is market cap weighted, companies that grow become a larger part of the index automatically. Companies that struggle shrink in influence or eventually get removed entirely. You do not have to pick winners and losers yourself. The index does that sorting for you over time.

Low cost. S&P 500 ETFs are among the cheapest investment vehicles available. VOO, for example, has an expense ratio of just 0.03% per year. Over a 30-year investing career those savings add up to a meaningful amount of money.

The Cons

Concentration risk. This is the big one that most people overlook. The S&P 500 sounds diversified because it has 500 companies in it. But as we covered earlier, just seven companies make up nearly 33% of the entire index and technology alone makes up 32% of it. If those seven companies or the technology sector broadly have a bad stretch, the whole index feels it. That is a real risk that deserves honest acknowledgment.

No small cap exposure. To get into the S&P 500, a company needs a market cap of at least $22.7 billion. That means you get zero exposure to smaller companies, some of which have historically produced very strong returns. If you want small cap exposure you need a separate fund.

For historical context on how small cap stocks have actually performed compared to large caps, check out our breakdown of US equity style returns since 1972.

Valuation risk. The S&P 500 buys companies based on their size, not their price relative to their earnings. That means during periods of market euphoria, when stock prices are very high relative to actual company profits, the index keeps buying at those high prices. That can increase risk during potential market bubbles.

No international exposure. Investing in the S&P 500 is essentially a bet that the United States will continue to be the world’s dominant economy and stock market. That has been a great bet historically. But there is no guarantee it continues forever.

For a look at how international markets have actually compared to the US over the long run, read our article on US vs. international equity returns.

The Bottom Line

The S&P 500 is one of the most followed and most invested-in indices in the world for good reason. It has delivered strong long-term returns, it is low cost, it is easy to invest in through any brokerage account, and it removes the need to try to pick individual winning stocks.

However, there’s still some things to consider. It is not as diversified as it sounds. It is heavily concentrated in a handful of technology companies. It does not protect you from inflation on its own (though it has historically beaten it). And it is entirely focused on the United States.

None of those things make it a bad investment. They just make it an investment worth understanding fully before you put your money in.

Investing in the S&P 500 is ultimately a bet that American companies will continue to grow, innovate, and generate profit over time. Over the last 50-plus years that has been a pretty good bet. Whether it will be just as good a bet over the next 50 years is a question worth thinking about.

Frequently Asked Questions

What is the S&P 500 in simple terms?

The S&P 500 is a list of the 500 largest publicly traded companies in the United States. It is used as the main benchmark for how the overall US stock market is performing. When people on the news say “the market was up today,” they are almost always referring to the S&P 500.

How does the S&P 500 work?

The S&P 500 is a market cap weighted index. That means larger companies have a bigger influence on the index’s performance than smaller ones. Companies need a market cap of at least $22.7 billion to qualify for inclusion. The index rebalances quarterly to reflect changes in company sizes and to add or remove companies that no longer meet the criteria.

What is the average return of the S&P 500?

From 1972 to present the S&P 500 has averaged about 10.90% per year. After adjusting for inflation (CPI at 3.94% per year over the same period) the real return is closer to 6.96% per year. Both numbers assume dividends are reinvested.

Is the S&P 500 a good investment for the average person?

Historically, yes. Most professional fund managers fail to beat the S&P 500 over long periods of time, which means most people would do better just buying a low-cost index fund than paying someone to try to outperform it. That said, it is concentrated in a small number of large technology companies and entirely focused on the US market, so it is worth understanding what you are actually buying.

What is the difference between the S&P 500 and the Dow Jones?

The Dow Jones tracks just 30 companies and weights them by share price rather than market cap. The S&P 500 tracks 500 companies and weights them by market cap, which most investors consider a more accurate reflection of the overall market. The S&P 500 represents about 80% of the total US stock market versus about 25% for the Dow Jones.

How do I invest in the S&P 500?

You cannot buy the index directly. Instead, you buy ETFs that track it. The three most popular are SPY (State Street), VOO (Vanguard), and IVV (BlackRock). All three hold essentially the same companies in the same proportions. Most long-term investors use VOO or IVV because they have slightly lower annual fees than SPY.

What is concentration risk in the S&P 500?

Concentration risk means that a large portion of the index is tied up in a small number of companies. As of April 2026, just seven companies (the Magnificent Seven) make up nearly 33% of the entire S&P 500 and the technology sector alone accounts for 32%. If those companies or that sector underperforms, the whole index feels it even though there are 493 other companies in it.

Does the S&P 500 beat inflation?

Historically, yes. From 1972 to present the S&P 500 returned about 10.90% per year while CPI inflation averaged 3.94% per year, leaving a real return of about 6.96% per year. It has also outpaced M2 money supply growth (6.63% per year over the same period), meaning it generated genuine wealth above and beyond dollar dilution over the long run.