Do you have $500 to invest in stocks? Put it in this index fund.

For most investors, getting started requires building from a small base. That’s normal. Building a large nest egg takes time and you have to start somewhere. However, it’s important to realize that starting small doesn’t mean you can’t build a good stock portfolio. That means you have to deal with it a little differently. If he only has $500 to invest in stocks, he should consider investing in this index fund. Here’s why:

ETFs are well structured for small investors

With $500, you can afford to buy a variety of stocks, as many stocks’ prices are below that number. However, you cannot buy too many stocks at once. And no matter which stocks you buy, you can’t buy a ton of them. (Yes, you could buy high-risk penny stocks that trade for just pennies a share, but that’s not a good plan for any investor, much less a new one.) Fortunately, that There is a better way to do it.

The simple answer is to buy an exchange-traded fund (ETF). ETFs are pooled investment vehicles. That is, they pool money from many different people and use a larger collective pool for their investments. This allows ETFs to create larger and more diverse portfolios than individual investors could create on their own. ETF investors do have to pay someone a fee, known as an expense ratio, to manage the ETF, but that cost is usually very modest. This is usually a cost worth paying for the immediate diversification benefit.

On the other hand, many brokerages (brokerage account required) offer free trading of ETF stocks, so costs are very low overall. This remains true even if you increase your position even more over time by saving money and buying more shares in the ETF. If you have enough money in the ETF and want to try your hand at buying individual stocks, you can sell some of your ETF shares and buy the individual stocks you want to own. In other words, ETFs are a great stepping stone investment to grow your portfolio, but if you don’t want that, you don’t need to go beyond a good diversified ETF.

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For most investors starting with modest stakes, such as $500, the near-perfect ETF investment is SPDR S&P 500 ETF Trust (NYSEMKT:Spy).

SPDR S&P 500 Trust ETF is a core holding

SPDR S&P 500 Trust is S&P500 As the name suggests, index. The S&P 500 is one of the most broad-based indicators of the stock market, and this ETF essentially means you can own “the market.” However, the S&P 500 is more than just a collection of random stocks. Index members are selected so that the collective group of holdings is representative of the broader economy. So not only are you getting a broad measure of the stock market, you’re also getting a broad measure of the U.S. economy. It is also updated regularly to ensure that the stocks on the list are the correct ones.

In addition to this, the S&P 500 is market capitalization weighted. This means that the largest stocks receive the most weight in the index. The largest companies are typically the best-performing stocks, so the SPDR S&P 500 Trust provides broad market exposure with an emphasis on the best-performing stocks. While the largest stocks may not be the best stocks to own as the market moves from bull to bear or vice versa, in most cases market cap weighting provides a net benefit for investors. It will be a profit.

Then there are costs, and the SPDR S&P 500 Trust has an expense ratio of just 0.09%. There are cheaper ETFs, but they have very low expense ratios. Considering the size of the portfolio and the ETF’s goals, the dividend yield is quite modest at only around 1.4%. If you’re looking to build an income-oriented portfolio, the SPDR S&P 500 Trust probably isn’t right for you, but it’s a great option for most other types of investors, especially those just getting started. Probably. You should probably set up dividend reinvestment. This will instruct your broker to automatically use your dividends to purchase additional shares.

The perfect foundation to start with or to own forever

One of the best things about the SPDR S&P 500 Trust is that it is always talked about in the media because the S&P 500 index is used by investors to track the market. You should be able to easily read what’s going on in the ETF without much effort. It’s a great basic investment that allows you to start investing and learn at the same time. In fact, you may even decide that it’s the only equity exposure you want to have.

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

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any stocks mentioned. The Motley Fool has a disclosure policy.

Do you have $500 to invest in stocks? Put it in this index fund.Originally published by The Motley Fool