You need a brokerage account, money to invest, and the ability to place an order through that broker's platform

Investing in an S&P 500 index fund means buying shares of a fund that tracks the 500 largest publicly traded companies in the United States. The fund itself does the work of holding all 500 stocks in the right proportions, so you own a piece of all of them with a single purchase. You do this through a brokerage account — a financial account that lets you buy and sell investments.

The process has three parts: opening an account at a brokerage firm, depositing money, and placing an order to buy shares of an S&P 500 index fund. The entire setup takes less than an hour, though the money transfer can take a few business days. You do not need a large sum to start — many brokerages let you begin with $1 or $100, depending on the fund.

The S&P 500 index fund itself is not a place you go to; it is a product offered by fund companies like Vanguard, Fidelity, or Schwab. You buy it through a brokerage account, which may be at the same company or a different one. Some brokerages charge a fee each time you buy; others do not. Some funds charge an annual fee to hold them; others charge almost nothing.

Key Takeaways

  • You must open a brokerage account before you can buy any index fund, and this account is separate from a bank account.
  • Different brokerages offer different S&P 500 index funds, and the fund you choose affects the annual fee you pay.
  • You can buy S&P 500 index funds through a regular taxable brokerage account or through a retirement account like an IRA or 401(k).
  • Once you buy shares, you can hold them for years without doing anything, or set up automatic monthly purchases to invest regularly.
  • The annual fee charged by the fund (called the expense ratio) ranges from near zero to 0.5 percent depending on the fund company and fund type.

Choose a brokerage and open an account

A brokerage is a company that holds your money and lets you buy and sell investments. Major brokerages include Fidelity, Vanguard, Charles Schwab, E*TRADE, and TD Ameritrade. Each one has a website and mobile app where you can open an account in minutes.

To open an account, you will need your Social Security number, a government-issued ID, your address, and a bank account or debit card to fund it with. The brokerage will ask whether you want a taxable account (where you pay taxes on gains and dividends each year) or a retirement account like a traditional IRA or Roth IRA (where taxes work differently). If you are not sure, start with a taxable account — it has no contribution limits and no rules about when you can withdraw money.

Some brokerages charge a monthly or annual fee to maintain an account; many do not. Some charge a commission each time you buy or sell; most major brokerages now offer commission-free trading. Check the brokerage's fee schedule before you open the account, or call their customer service line to ask.

Decide which S&P 500 index fund to buy

Once your account is open, you will see a list of available funds. The three most common S&P 500 index funds are the Vanguard S&P 500 ETF (ticker: VOO), the Fidelity S&P 500 Index Fund (ticker: FXAIX), and the Schwab U.S. Equity ETF (ticker: SWTSX). These are exchange-traded funds (ETFs) or mutual funds — both track the same index but trade slightly differently.

The main difference between funds is the annual fee, called the expense ratio. VOO charges 0.03 percent per year, FXAIX charges 0.015 percent, and SWTSX charges 0.03 percent. On a $10,000 investment, that means you pay $3, $1.50, or $3 per year in fees. Over decades, a lower fee saves you thousands of dollars because that money stays invested instead of going to the fund company.

You can also buy an S&P 500 index fund directly from the fund company itself — Vanguard, Fidelity, or Schwab — rather than through a different brokerage. This sometimes gives you access to lower-cost share classes or avoids a middleman, but the difference is usually small. The fund you choose matters less than starting to invest; any of these three will track the S&P 500 closely.

Deposit money into your brokerage account

After you open the account, you need to move money from your bank into the brokerage. You do this by linking your bank account to the brokerage and initiating a transfer. The brokerage will ask for your bank's routing number and your account number, which you can find on a check or in your bank's app.

The transfer usually takes three to five business days. Some brokerages let you start trading when ready with a "good faith" deposit while the transfer clears; others require the money to arrive first. Once the money is in your brokerage account, it sits there as cash until you place an order to buy a fund.

You can deposit as much or as little as you want. There is no minimum for a taxable account at most brokerages, though some funds have a minimum first purchase (often $1 to $1,000). If you plan to invest regularly, you can set up automatic monthly transfers from your bank to your brokerage account.

Place an order to buy shares

Once your money is in the brokerage account, you are ready to buy. Log into your account on the brokerage's website or app and search for the fund you chose by its ticker symbol (VOO, FXAIX, or SWTSX). Click on it to open the fund's page.

You will see a button that says "Buy," "Trade," or "Invest." Click it and enter the amount you want to spend or the number of shares you want to buy. If you enter a dollar amount, the brokerage will calculate how many shares that buys based on the current price. If you enter a number of shares, it will show you the cost. You can buy fractional shares — meaning you can spend $100 even if one share costs $450.

Before you confirm the order, the brokerage will show you the price, the number of shares, the total cost, and any fees. Review this information and click "Confirm" or "Submit." The order usually executes when ready during market hours (9:30 a.m. to 4 p.m. Eastern time on weekdays). If you place an order after hours or on a weekend, it will execute at the next market open.

Set up automatic investing or buy once and hold

After your first purchase, you can choose to invest a lump sum once and then leave it alone, or set up automatic monthly purchases. Many brokerages let you schedule a recurring transfer from your bank account and an automatic purchase of the same fund each month. This is called dollar-cost averaging — you buy more shares when the price is low and fewer when the price is high, which can reduce the impact of market swings over time.

To set up automatic investing, go to the "Recurring Investments" or "Automatic Investing" section of your brokerage account. Enter the fund ticker, the dollar amount you want to invest each month, and the date you want the purchase to happen. The brokerage will handle the transfer and purchase automatically.

You do not have to do anything after you buy. The fund will continue to hold all 500 stocks, rebalance itself to stay aligned with the index, and pay you dividends (small cash payments from the companies' profits). You can reinvest those dividends automatically by checking a box in your account settings, which means the dividends buy more shares instead of sitting as cash.

Understand the tax treatment of your investment

If you bought the fund in a taxable brokerage account, you will owe taxes on any gains when you sell, and on dividends each year. The brokerage will send you a tax form (Form 1099-DIV for dividends, Form 1099-B for sales) that you use when filing your taxes. You do not have to do anything during the year — just keep the forms when they arrive.

If you bought the fund in a retirement account like a traditional IRA or Roth IRA, the tax treatment is different. In a traditional IRA, you may get a tax deduction for the money you contribute, and you pay taxes when you withdraw in retirement. In a Roth IRA, you contribute after-tax money, but withdrawals in retirement are tax-free. The brokerage will handle the tax reporting for these accounts.

Index funds are tax-efficient compared to actively managed funds because they trade less often, which means fewer taxable events. This is one reason they are popular for long-term investing.

Frequently Asked Questions

Can I buy an S&P 500 index fund if I don't have much money to start?

Yes. Most brokerages let you open an account and buy fractional shares with as little as $1 or $100. You do not need thousands of dollars to begin. Many people start with a small amount and add to it over time through automatic monthly purchases.

What's the difference between an ETF and a mutual fund version of the S&P 500?

Both track the same index and hold the same 500 stocks. ETFs trade like stocks during market hours and may have slightly lower fees. Mutual funds trade once per day after the market closes. For most investors, the difference is small enough that either choice works well.

Do I have to pick the cheapest S&P 500 index fund?

The lowest expense ratio saves money over time, but the difference between 0.015 percent and 0.03 percent is small on most accounts. Pick a fund from a major brokerage you trust. The bigger factor is how much you invest and how long you hold it, not which fund you choose.

What happens if the stock market crashes after I buy?

Your shares will be worth less on paper, but you still own them. If you sell when ready, you lock in the loss. If you hold and continue buying during the downturn, you buy more shares at lower prices. Historically, the S&P 500 has recovered from every crash and reached new highs within years.

Can I set up automatic purchases in a retirement account?

Yes. Most brokerages let you set up automatic monthly purchases in IRAs and 401(k)s the same way you would in a taxable account. You contribute up to the annual limit for that account type, and the brokerage buys the fund automatically each month.