Why You Should Invest in Standard & Poor's Depository Receipts

SPDR stands for Standard & Poor's Depository Receipts, which are instruments that are traded on the stock exchange. These instruments are part of the Exchange Traded Funds that invest in baskets of stocks that reflect the composition of a stock index, such as the S&P 500, in this case. When you purchase SPDRs, you are actually buying an interest in the stocks of all the 500 companies that make up the S&P 500 index.

SPDRs represent units of ownership in the SPDR Trust, which is a long-term investment trust established to maintain a portfolio of common stocks that act as an indexed fund following the movements in the Standard & Poor's 500 index. These instruments, or units of ownership in the trust, are traded on the American Stock Exchange under the symbol SPY, and can be purchased, held, and sold just like any stock. Since the trust is administered to reflect the Standard & Poor's 500 Composite Stock Price Index, the price of a unit is one tenth of the current value of the S&P 500.

Indexed Funds

Indexed funds or ETFs ("Exchange Traded Funds") are made up of investments that reflect some reference index, such as the Dow Jones, the Wilshire 5000, or in the case of SPDRs, the S&P 500. Other indexed funds invest in certain sectors of the market, certain sized companies, or certain regions of the world.

These funds are not actively managed by teams of professionals, but rather follow their reference indices. They offer the advantage of participating in many different companies and thereby diversifying your portfolio of investments, automatically and passively. Since these funds are fixed to a reference index, in the long term, you will realize the rate of return corresponding to the index. But you can buy and sell ownership interests in these funds daily if you like, the same as stocks, in order to take advantage of fluctuations in the referenced market index.

Characteristics of SPDRs