There is something on the website about this already, but I’ll go through an explanation now:
An index is used to rate the performance of a company. An index fund is a fund which invests in all the stocks contained in a certain index. If you invest in an index fund, you are therefore investing in a basket of companies rather than one, or two stocks.
How Do You Invest
You can invest in index funds through a regular stock market broker, with your bank or through a wealth management app. You invest in these funds in the same way you would invest in other stocks. You buy them at the market price…
The most famous index fund is the Vanguard S&P 500 Index Fund. This index fund invests in the best 500 companies in America at any given time. When you invest in this sort of fund, you are effectively investing in the American economy.
The Cost Advantage of Index Funds
The most important aspect of index funds is their cost (normally between .2%-.5% p/a). These costs are deducted from the stock by the company which has produced the stock. While these costs may seem small. They amount to enormous amounts of money over long periods of time.
If you invested 10k with a fund manager for forty years with a return of 7% every year at a cost of 1.5% p/a. You would have $1,392,000 after forty years!
If you invested the same amount for forty years with the same return, except it was 1% cheaper - .5% p/a - you would have $1,854,578!
About a $500,000 difference!