What are index funds?

Video: Index Funds
Why investors buy index funds.
Investors invest in index funds
for various reasons. They invest in index funds to create wealth, achieve
financial stability and independence, plan for retirement, vacation, or
education. Because they are usually passively managed, meaning fund managers
are not actively researching, picking and selling securities, they incur less
cost to investors. A single index fund can include all the stocks or securities
of an index (e.g. S&P 500) or a good portion of it.
How to purchase index funds.
You can buy index funds from a
broker (Fidelity, E-trade, TD Ameritrade, etc.) or from the fund
itself. Investors buy index funds at the fund's net asset value (NAV). The NAV
is nothing more than the amount of money you need to buy one share of the fund.
Here are the steps you need to take to buy index funds: 1) open a brokerage account; 2) fund your account; 3) decide how many shares of the index fund you
want to buy; 4) choose your order type. Although index funds are less risky investments compared to stocks,
you should always read the fund's prospectus. This is a document that outlines the
fund's investment strategy, fees, risks, among other things. Here's a nice
little guide on how to evaluate and select index funds for your portfolio.
Ready to invest in index funds? Choose a platform below.
Benefits & risks of index funds.
As an investor, owning index
funds comes with risks and benefits. If the index fund's price or net asset
value (NAV) goes down, you will lose money and vice versa. There is no
certainty that companies whose stocks the index fund holds will prosper or do
well. To a large extent, an index fund's NAV is dependent upon the basket of
securities (stocks, bonds, cash, etc) it holds. Many factors affect an index
fund's share price (NAV), including but not limited to quarterly earning
reports of individual companies, regulatory, political, economic and other
events.
How investors make money from index funds.
Investors make money in two major ways. First, they earn money through capital gains. A capital gain is essentially the increase in price of a fund to a price higher than the initial purchase price. Second, investors make money through dividends. Dividends are basically free money you get for simply owning the fund or being a fund holder. Dividends are usually paid to shareholders quarterly. Not all companies pay dividends. Index funds are meant to be kept for the long-term. Here's a nice overview of how investors earn money from mutual funds. Check out this nice comparison between stocks, ETFs and index funds.