Investing in Index Funds

Index investing is shockingly easy. This allows you to own shares of some of the well-known companies in America. The next simple and easy steps will explain how you can do it.

What is an index? The index is a group of stocks assigned to represent parts of the stock market - the Nasdaq 100, the S&P 500, the Dow, and the Wilshire 5000. Investing in S&P 500 or the Wilshire 5000 for instance will allow you to be part owner of General Electric, Tupperware, or Microsoft.

Why are you investing in an index? The return of the overall stock market is matched as closely as possible by a broad-market index. This is a great opportunity as most mutual funds find this hard to do. Over the last 10 years, less than 20% of actively managed diversified large-cap mutual funds have outperformed the S&P 500.

Save money There is no doubt index investing is cost-efficient. The index funds just invest directly in whatever companies are in the index with no need of MBA-toting analysts. This is where significant reduction of operating fees charged to the shareholders occur, leaving more of your money saved to grow.

Buy the fund or the stock Two main ways to invest in indexes are either through mutual funds or through ETFs (exchange-traded funds) trading like regular stocks on the American Stock Exchange. For mutual funds or ETFs, the performance doesn't really matter as the returns are almost identical. There are a few things about each type of investment however that may sway you one way or the other.

Always check those fees ETFs and index funds have annual charges or expense ratios calculated at the amount invested. Bear in mind that there is no need to invest in ETFs or index funds with an expense ratio greater than 0.40 or four-tenths of a percent.