What is an Index Fund?
An index fund comprises a specific selection of stocks designed to track the performance of a financial market sector. There are 11 market sectors that essentially every publicly traded stock falls into; Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Information Technology, Telecommunication Services, Utilities, and Real Estate. Therefore, 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 payments. 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 these funds are diverse groups of stocks, the fund tends to have less volatility. In addition, the United States stock market has never failed to set a new record high. For this reason, long-term holdings in index funds are an excellent 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 you invest around 50-75% of your stock market portfolio in these kinds of 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