Investing in the stock market can be difficult. Despite the effort you put into fully understanding how it works, there are so many different aspects of it that it can easily overwhelm the new investor. For many, it is the massive amount of information that can be a challenge. And for others, it's just not that engaging a topic to keep them interested. Add to that the amount of time needed to fully grasp the investment strategies, it's easy to see why new investors are often encouraged to first learn about index funds. But even before you can do that, you need to learn what are index funds.
What Is a Stock Market Index?
Before you can fully grasp what an index fund is, you'll need to know what is a stock market index. In simple terms, it is a number associated with a specific group of stocks. You've probably heard references to these indexes in your TV news reports. The most well known of these indexes is the S&P (Standard and Poors) and the Dow Jones Industrial Average; each of these indexes is a collection of different stocks and are seen as a quick way to gauge the market's performance overall.
An index fund is a specific type of fund that gathers money from different investors and pools them together to invest in a stock index. So, if you choose to invest in a fund that is following the S&P, then that fund will be working to buy and sell the stocks on that index using the same ratios that are seen on the market.
Difference Between Index Funds and Mutual Funds:
If you're still wondering 'what are index funds' you'll also need to learn how they differ from mutual funds. The difference is not so much in the fund itself but in how they are managed. Mutual funds are actively managed, which means they have a fund manager whose goal is to beat the market to increase your returns. With his knowledge of the market, he will search out stocks and attempt to time his buying and selling in an effort to get the highest returns.
While many people may believe that is the way to beat the market, statistics show that index funds tend to have a better performance over the long haul than actively managed funds. You don't need to know that much about stocks in order to be successful at investing with index funds and you will be able to keep more of the returns you earn when you do.
There are many advantages of investing in index funds. Not only will you be able to outperform those actively managed investments over the long term, you won't also have to spend countless hours in research in order to make a decision. In fact, it is a great way to help you to maintain more of your investment dollars in your own pocket and lower your tax hit at the same time.
So, if you're wondering about what are index funds and how to get started in the stock market, it is possible to see that once you get the answer to what are mutual funds, you too can get a big bite out the stock market.