Index funds are one of the best ways to invest for both beginners learning how to invest and sophisticated investors looking to build wealth.
Why? Because they are one of the cheapest and easiest ways to get exposure to the market as a whole.
An index is a basket of securities/companies that represent and measure the performance of a specific market. It’s used to measure and observe the overall health, past and present performance, and price changes of companies within a particular market.
A market index is not something you can directly invest in.
BUT you CAN have exposure to and invest almost identically to the market index by investing in an index fund.
An index fund is an investment that’s sole purpose is to track a market index.
You cannot go invest in the S&P 500 Index directly. BUT you CAN invest in the S&P 500 index funds created by different brokerage firms like Vanguard, Fidelity, Charles Schwab, etc.
An Index Fund – A type of mutual fund. An example of an index fund that tracks the S&P 500 Index is VFINX – the Vanguard 500 Index Fund.
An Index ETF – A type of ETF. An example of an index ETF that tracks the S&P 500 Index is VOO – The Vanguard S&P 500 Index ETF
(*Note* – The term index fund is used interchangeably with Index ETFs. The only major difference between the two are the way they trade on the exchange. For purposes of this blog post – Index ETFs or Index Mutual Funds will be called Index Funds) Read this blog post to learn more.
These brokerage firms created an opportunity for investors to easily get access to a broader scope of the market by being able to invest in 1 single index fund – where within that 1 fund it may hold hundreds or thousands of companies.
They effectively do the work for us, provide diversification and overall exposure to a market at a fraction of the time it would take for you to do yourself or the cost for you to pay someone else to do for you. Win win.
Index funds may not be the answer for everyone but I believe they are an incredible option for the beginner, average and sophisticated investor alike for all the reasons mentioned above.
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