I've phrased this question in an ELI5 manner setting the stage with a list of basic Q&A's to build the foundation, and ending with an actual question.
[Q] What is S&P 500?
[A] S&P 500 is an index tracking the top 500 US companies.
[Q] What is an index?
[A] An index is a number calculated to represent/track a certain subset of a market. A subset of a market can be - "top 1000 Asian tech companies", "top 100 EU companies", "top 10 mining companies"
[Q] Who decides which "top 500 US companies" get on the list?
[A] The S&P people come together and calculate. They calculate the market cap of each company and make a list of 500 best. A market cap is:
stock price X number of stocks.
[Q] How to you get from "top 500 market caps" to a single number?
[A] You average it across all companies and further divide it by a divisor. The presence of the divisor is the reason the S&P 500 index isn't in dollars
[Q] How do I invest in the S&P 500?
[A] You can't. It's just a number. However you can buy shares of a fund which is following that index.
That sums up the Q&A now the questions I don't know the answer to:
- What does it mean that a fund follows an index?
- How does a fund following an index decide on the ratio of the stocks to buy?
- What happens with dividends?
- How does the fund act if the index divisor changes, or the list of companies in the index changes?