[MUSIC] What if I
told you there's an easy way to start investing,
where you'll most likely see financial gains over
time and you don't have to be a trading professional?
Don't believe me? As the great investor,
Warren Buffett once said,
"By periodically investing in an index fund,
the know-nothing investors can actually
outperform most investment professionals."
Hi, I'm Kate with The Motley Fool.
I'm going to break down what an index fund
is and how to start investing in them.
Before we go in-depth,
let's break down some key terms.
Index. An index is a selection of stocks like
the Dow Jones Industrial Average or
the S&P 500. Index fund.
An index fund is an investment that tracks
a market index typically made up of stocks or bonds.
Index funds typically invest in
all the components that are included in the index they
track and they have fund managers whose job it is to
make sure the index fund
performs the same as the index does.
One of the most popular indexes is the S&P 500.
The S&P 500 includes 500 of
the largest companies in the US based on several factors,
including profitability, amount of trading volume,
and market capitalization, just to name a few.
When you invest in
an index fund that tracks the S&P 500,
you will own stock in
all the companies within that index.
Something to note, your investment won't
be split equally between the company as
most indexes weigh the distribution amount
based on those factors I previously listed.
Investing in an index fund is one of
the most effective ways for investors to start building
wealth therefore people looking to passively
invest and looking to match market returns,
instead of trying to beat them with active stock picks.
Something to note but not covered
in this video is an ETF,
which is a fund that trades like a stock.
What are the benefits of investing in an index fund?
Number one, minimize your time
spent researching individual stocks.
Instead, you can rely on the fund's portfolio manager to
invest in index that already
includes stocks you want to invest in.
Number two, you can invest with less risk.
Most indexes include dozens,
if not hundreds of stocks.
That diversification can leave you less likely to suffer
the losses if something bad
happens to one or two companies in the index.
Number three, index funds are
available for a wide variety of investments.
You can buy stock index funds and bond index funds,
which covers the two big parts
of most people's investing strategy.
But you can also buy more focused index funds
that drilled down into certain parts
of the financial markets.
Number four, it's a lot less expensive.
Index funds are usually far less costly
than alternatives like actively managed funds.
That's because the index fund manager just has to buy
the stocks or other investments in the index.
You don't have to pay them to
come up with stock picks of their own.
You'll pay less in taxes.
Index funds are quite tax-efficient
compared with many other investments.
For instance, index funds don't do much buying
and selling of their holdings as actively managed funds.
Index funds less often generate
capital gains that can add to your tax bill.
Number six, it's a lot
easier to stick with your investing plan.
When you use index fund,
you can automatically invest month after
month and ignore short-term up and downs,
confident that you'll share in
long-term growth of the market.
As simple and easy as index funds are,
they are not for everyone.
They can come with some downsides.
Number one, you'll never beat the market.
Index funds are designed solely to
match the market's performance.
Number two, you won't always own the stocks you like.
Depending on the index you choose,
you can end up owning some stocks you'd rather
not own or missing out on others you prefer.
You made your pro and con list and you've
decided you want to invest using index funds.
Let's see how to make that happen.
Ticking index, there are hundreds of
different indexes as discussed,
the most popular index is the S&P 500.
You may have also heard of tech-heavy,
Nasdaq-100 or the Russell 2000
packed with 2,000 of
smaller companies available in the market.
There are tons of options
depending on what you're interested in.
Now you have to choose the right fund for your index.
Once you've chosen an index,
you can generally find an index fund that tracks that.
For popular indexes like the S&P 500,
you may have a dozen or more choices,
all tracking the same index.
There are companies like Vanguard, Charles Schwab,
and TD Ameritrade, just to name a few.
Now you have to buy the index fund shares.
There's generally two ways to go about this.
You can open an account with
a mutual fund company that allows you to invest directly
into the index fund that they offer
or you can open a brokerage account.
With a broker, you can buy and
sell into the index funds that you are interested in.
Index funds offer investors of all skill levels a simple,
successful way to start investing.
I hope this video helped you on your investor journey.
At The Motley Fool, our purpose
is to make the world smarter,
happier, and richer [MUSIC].