The S&P 500, or more accurately the Standard & Poor's 500, is a stock index generally made up of 500 of the largest U.S. companies that are traded on U.S. stock markets (it has a few additional rules that make the list a bit more selective). Most of the stocks in it, from Microsoft (NASDAQ:MSFT) to Apple (NASDAQ:AAPL) to Johnson & Johnson (NYSE:JNJ), are household names. If you want to invest in companies you know and make bets on many of America's biggest businesses, buying stocks on the S&P 500 is one way to do so.
Many of the stocks on the S&P 500 also happen to be expensive. A single share of Apple would set you back around $380. But the good news is that you don't need a lot of money to invest in any of the large companies on the S&P 500 -- or even to invest in all of them.
In fact, if you can afford to buy a penny stock, you can now afford to own any company -- or every company -- in this index. Here's how.
Fractional shares open up the door for those with less cash
Today, an increasing number of major brokerage firms allow you to buy fractional shares of a company rather than restricting you to purchasing full shares only. Fractional shares are exactly what they sound like -- fractions or parts of a full share of stock.
While investors have traditionally needed enough money to buy at least one full share before they could own a piece of a company, fractional shares eliminate this barrier to entry. When you invest in fractional shares, you can buy as little as 0.001 of a share (depending on the broker). You just specify what stock you want and the dollar amount to invest, and you'll be able to buy whatever portion of a share you can afford.
If you've got $5 to invest, for example, and decide you want to buy into Facebook (NASDAQ:FB), you could get around 0.022 of a share of this S&P 500 company, which is trading at just over $230 a share (as of July 25).
Where once you'd have been relegated to penny stocks only if you had so little cash to invest, you can now own a small piece of some of the country's biggest companies. And the percentage gains (or losses) you'll attain will be the same as those of any other investor, no matter how many full (or partial) shares they own.
How to buy S&P 500 stocks at penny-stock prices
With fractional shares, you could invest in one or several companies on the S&P 500 even if you've got only a few dollars. But if you've got just $5 or $10 to put in the market, you aren't going to be able to buy too many of the big-name companies on the list even if you're only buying .001 of a share of them.
But you do have another option: You can buy fractional shares of exchange-traded funds (ETFs) that track the S&P 500 index. ETFs trade like stocks but give you exposure to a basket of investments with a single purchase. Funds that track the S&P 500, for example, pool investor money to buy weighted shares of the stocks on the index. So when you buy into an ETF such as the Vanguard S&P 500 ETF (NYSEMKT:VOO) or the SPDR S&P 500 ETF Trust (NYSEMKT:SPY), you get a very small ownership stake in all of the 500 companies on the list.
Vanguard's fund comes in at a price of around $300 for a single share of the ETF, while the SPDR ETF has a higher price tag at around $320 per share (as of July 25). Other S&P ETFs trade for a similar amount. At those prices, if you've got even $1, you could still buy in with some brokers and get your piece of 500 huge American companies for just the price of a few penny stocks.
Should you buy S&P 500 stocks?
While fractional shares enable you to risk much less than if you had to pay full price for an S&P 500 index fund (or for shares in companies on the S&P 500), you're still taking a risk with your money. It's smart to research any equities you're considering investing in carefully and to make sure you're building a diversified portfolio that gives you exposure to companies of all sizes.