Every serious Australia investor has to, at least, consider buying a few S&P (Standard and Poor’s) index shares.
Not only will you diversify your portfolio considerably, but you will also make long term gains. Expect gains of 6-7% per year (this is the average for the last 40 years).
What is S&P 500?
The letters S&P represent Standard and Poor, which refer to the two financial corporations that established this stock market index.
This time-honoured stock market index is renowned for tracking the 500 most established United States corporations. The stocks are measured by market capitalization across all industries.
It is considered one of the best stock indexes that has over the years monitored the performance of large U.S. stocks on a daily basis. In the past decade, S&P 500 managed to make annual returns amounting to 9.49 percent every year.
S&P aims to price stock in such a way that it gives you a quick glance at the economic performance of the country through the stock market. Without a doubt, a number of monetarist professionals as well as financial media rely on the S&P 500 index due to its popularity in accurately measuring the total value of various shares of stock.
Here is what the SP500 chart looks like for the last 5 years:
Its main rival, the Dow Jones Industrial Average (DJIA), also attracts attention from the general public and the mainstream media.
However, S&P 500 tracks more companies (500) using weighted average market capitalization, while the DJIA tracks only about 30 companies using narrowly reflected price-weighted indexes. Furthermore, the index has 505 stocks because some companies have two classes of shares e.g. the Buffett’s Berkshire Hathaway.
How Can I Buy S&P 500 Shares?
If you are ready to invest in S&P 500 shares, it is advisable to start testing the waters by buying a mutual fund, which is also known as exchange-traded fund (ETF) since it allows you to place your investment in all stocks.
Even though it is not practical to buy shares in all the S&P 500 stocks, you can spread your risk in the corresponding weights of each. The mutual funds or ETFs will help you invest in an S&P 500 index fund.
As per the advice of the famous investor, Warren Buffett, individual investors can get some of the highest returns from purchasing shares and making a long-term investment in an S&P 500 index fund.
Even though the annual returns may not increase on an annual basis, over the years, investors who constantly purchase and hold index funds from the S&P 500 have enjoyed yearly returns averaging 10 percent.
Make sure you are investing for the long term as there can be a lot of volatility on the short term.
It is important for you to note that an index fund is a form of investment fund that mimics a predetermined assortment of stocks instead of selecting specific stocks that would do well.
The biggest question here is the exact process of buying shares in an S&P 500 index fund, which is quite an easy step-by-step process and involves setting up an account.
Step 1: Select your Most Preferred S&P 500 Index Fund
Even if you are new to the financial game of investing, don’t be timid while looking for the best S&P 500 index fund.
The rule of thumb is that index funds usually have similar stocks with the same weightings as compared to other funds with the same index. In layman’s terms, it’s like visiting 7 KFC fast-food restaurants in New York City that serve exactly the same fried chicken and you have to select one among them.
This is where you have to choose the one selling at the lowest price.
Similarly, this also applies to selecting index funds. To determine their long-term costs, you should focus on the expense ratio. This is the fees paid to the fund manager to allow you to own the fund in the course of the year.
Furthermore, you should know whether you are charged for the sales load (which you should totally avoid) if you are investing in mutual funds. You should note that S&P 500 index funds have extremely low expense ratios, and it doesn’t matter which one you choose.
Step 2: Set Up A Brokerage Account
Setting up your brokerage account is the next step towards buying ETFs and mutual funds. It also enables you to buy bonds and stocks if you want to in the future. In less than 15 minutes, you can open the account, but you must ensure that it reflects the investment types that you plan to make.
It is advisable to avoid transaction fees from brokers if you have chosen to trade in mutual funds. On the other hand, when purchasing an ETF index fund, always consider brokers who do not charge you commissions for every purchase. Generally, the most preferred brokers are those who don’t require trading fees if you are buying thousands of mutual funds or hundreds of ETFs.
You can also search online for various broker comparison tools so that you can select a good broker that quickly opens your account, lowers your expenses, and satisfies your needs completely.
Step 3: Determine Your Investment Threshold
While investing in stocks is not meant only for the wealthy, the most important thing to do is to have a plan from the onset.
The plan must start with indicating your amount of investment. The best strategy is to come up with a figure that allows you to invest in the market comfortably on a monthly basis. Since this is a long-term mission, your account should have sufficient money so that you have ample time for the market to rise and settle any downward spirals.
The figure you arrive at as your investment threshold should be moved to your brokerage account and set it in such a way that you can add the desired amount from your bank account on a monthly basis.
Find it necessary to stick to a broker that lowers your costs so that you save up money for more investments.
Step 4: Buy the Index Fund
After selecting your most preferred index fund and knowing the exact figure to invest, now its time buy the S&P 500 index fund and initiate the trade through the website of your broker. You will see an “easy trade entry form”, which would prompt you to enter the ticker symbol of the index fund as well as the number of shares that you want to buy.
Depending on the balance in your brokerage account, you can as well set up a trading schedule, which allows you to periodically purchase an index fund at a specific date and time of the month. As an investor, this helps you to increase your returns and reduce risks by capitalizing on the benefits that come with dollar-cost averaging.
Top 3 Brokers to Buy S&P 500 Shares
Here are our top rated brokers for S&P500 shares:
This social trading platform was founded in 2007 and has over 6 million clients globally, including Australia residents. You can invest in stocks, cryptoassets, and trades in CFD assets. It offers copy trading services, which works well for beginners who can open an account with an initial deposit of $200.
With its demo account, eToro gives users the opportunity to try its social concept, and they can choose to upgrade to the live trading account when desired. The Australian broker standards regulate the platform, but if you sign up using a residential
address located in Australia, the ASIC license will be used to register your account.
Based in Sydney, Australia since 2008, Plus500 is an efficient forex and CFD broker that trades in a number of financial markets with fairly low spreads and zero commissions. Its license is held by the Financial Conduct Authority and it is registered in the United Kingdom.
Australian traders consider Plus500 safe since top-tier regulators monitor it and it remains listed on the London Stock Exchange, which means that its finances are publicly available. Apart from actively sponsoring professional Rugby and Soccer clubs, Plus500 has clients in
over 50 countries globally and has a market capitalization of $2.25 billion.
Established in 2011, Fortrade is a derivative brokerage company based in the UK.
They allow Australian customers to trade in CFDs and forex in over 150 currencies. The Financial Conduct Authority (FCA) regulates its operations, making it one of the trusted trading platforms in Australia due to its scalable platform and intelligible technology.
Through its in-house Fortrader platform for brokers and the renowned MetaTrader 4 (NT4) platform, Fortrade appeals to Australian traders because the latter comes with a retail account and a pro account with varying leverages. Even though Fortrade prevents instances where clients lose their investments, they warn that only experienced traders should try CFD trading.