How Should a Beginner Invest in Stocks? Try This Index Fund.

Adria Cimino, The Motley Fool

Fri, May 10, 2024, 3:50 AM 5 min read

Getting started as an investor may seem intimidating for one big reason. You often hear about particular stocks -- market stars of the moment -- that have soared. And you may think that to become a successful investor, you need to identify the star of tomorrow. Nvidia's a great example of today's star, climbing 215% over the past year thanks to its dominance in the artificial intelligence (AI) chip market.

But here's some great news for you. You don't have to pick out one or even 10 future winners to begin investing and build a rock-solid portfolio that will deliver top returns over time. In fact, you can get started with one simple move that doesn't require a lot of research, knowledge, or time. It doesn't even require a huge investment. I'm talking about buying shares of an index fund that will offer you exposure to today's leading companies -- and allow you to share in their successes over time. Let's find out more.

A group of friends smile and look at something on a computer. — Image source: Getty Images.

A fund for beginners and seasoned investors

Index funds do exactly what they imply: They include companies that are members of a particular index so that they can mimic that index's performance. And one that makes a great investment for a beginner investor -- or a seasoned player -- is the SPDR S&P 500 ETF Trust (NYSEMKT: SPY). This is an exchange-traded fund, trading daily on the market just like a stock -- so you can buy it as you would a stock.

The SPDR S&P 500 ETF, as its name implies, tracks the performance of the S&P 500, so it includes the companies that are in this benchmark. And since the S&P 500 encompasses companies driving today's economy, when you buy shares in this ETF, you're getting in on not just one but many exciting growth stories.

For example, right now the most heavily weighted stocks in this ETF include Microsoft, Apple, Nvidia, and Amazon -- companies that have roared higher in recent years thanks to their leadership in their markets, and in many cases, their investments in the high-growth area of AI. And 29% of the fund is invested in information technology companies, making it the most-represented industry in the ETF and in the S&P 500 today.

Even though this may seem like a tech-heavy investment, it actually isn't. That's because the ETF also offers you exposure to 10 other industries, from healthcare to industrials and even real estate. So, while you'll benefit from the growth of the day's high-momentum stocks and industries, you'll also get a chance to take part in stories in other areas -- and this diversification limits the potential for losses if one company or industry suffers. The strength of the ETF is it offers you a way to immediately add diversification to your portfolio.

ETF investing versus stock picking

Of course, this diversification also limits your gains to a certain degree. For example, the SPDR S&P 500 ETF rose 27% over the past year while Nvidia soared in the triple digits. The most explosive gains generally will come from picking individual stocks with quality businesses, a strong moat, and solid long-term prospects.

But that's OK. ETFs aren't meant to replace stock picking, and instead, both may be used together to create a fantastic long-term portfolio. An ETF tracking the S&P 500 also may especially appeal to the cautious investor because the benchmark over time always has gone on to gain after periods of losses -- so, if history is a guide, this type of investment is likely to score a win for you over the long run.

Finally, the S&P 500 changes over time, inviting in companies that are proving their strength in the current economy (and dropping companies that aren't significantly driving growth). The SPDR S&P 500 ETF follows these moves, offering you the opportunity to continually hold stakes in only the most promising companies of the times.

As I mentioned earlier, this index fund is a great addition to any investor's portfolio. But if you're new to investing, buying shares of the SPDR S&P 500 ETF could be a particularly smart move: Through just one investment, and without worrying about choosing the right stocks, you gain access to a wide range of winning players -- and ones that could deliver significant returns over time.

Should you invest $1,000 in SPDR S&P 500 ETF Trust right now?

Before you buy stock in SPDR S&P 500 ETF Trust, consider this:

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Apple, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

How Should a Beginner Invest in Stocks? Try This Index Fund. was originally published by The Motley Fool

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