The S&P 500 is made up of 500 of the biggest American stocks on the market. All listed stocks in the index must have a market capitalization of over $5.3 billion and four straight quarters of positive earnings, along with meeting several other requirements regarding liquidity and trading volumes.
Index funds allow you to buy all stocks in the index at once. You can use direct indexing with any index. But since the S&P 500 index is so popular, we’ll use that for our examples in this article.
With direct investing, an investor would buy all 500 stocks individually rather than in an index fund. Doing so gives an investor exposure to the entire index, with all the benefits of diversification that come with an index fund. But instead of an investment fund manager keeping the entire fund in balance with the S&P 500, you (or a computer or financial advisor) handle it directly.