index funds

Everything You Need to Know About Index Funds

What is an index fund?

An index fund is comprised of a specific selection of stocks designed to track the performance of a financial market sector. There are 11 market sectors that every publicly traded stock falls into; Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Information Technology, Telecommunication Services, Utilities, and Real Estate. An index fund will either mimic the progress of one of these sectors or represent all of them in a total stock market fund.

How can you make money from index funds? 

There are two ways to make money from investing in index funds, share price increases, and dividend paybacks. There is a specific share price associated with each index fund, and as the price fluctuates so do your earnings. This is similar to individual stocks but because index funds are diverse groups of stocks the fund tends to have less volatility. With the United States stock market never failing to set new record highs, long-term holdings in index funds is a great low maintenance strategy with minimal associated fees.

What percent of my stock market portfolio should be index funds?

Deciding where to invest varies greatly from person to person depending on risk tolerance, age, and preference. Index funds tend to be more consistent and require less attention but are relatively less profitable short-term. It is recommended that around 50-75% of your profile is invested in index funds.

What are some examples of index funds? 
  • (DJI) Dow Jones Industrial Average Index- Tracks the total stock market through 30 large-cap companies
  • (IXIC) NASDAQ Composite- Tracks the information technology sector through 3,300 companies
  • (INX) S&P 500 Index- Tracks the total stock market through 500 companies
  • (RUT) Russell 2000 Index- Tracks the total stock market through 2000 small-cap companies

Dow Jones – 10 Year Daily Chart

(Chart source)

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