What are index funds and what’s the difference between them and regular stock trading?
In: Economics
An index is a collection of companies. That connection can be along several different lines, such as companies in the same sector, companies of similar size, companies in the same geographical area, or by adjacent sectors (think Tesla and Cobalt mines, but hundreds of times, another example is traditional car companies and oil companies)
An index fund is where people pool their funds to buy stocks from each of the companies on the index. Modern index funds use computers to highly automate the process to follow the index as companies come and go. You can buy a share in the fund and have a amall ownership in the pool.
They are highly popular as it self insulates against individual companies. In the example of Tesla and Cobalt miners, if Tesla finds a way to not need Cobalt anymore, then the Cobalt mine companies might lower in price while the Tesla stock would increase by more than enough to make up for it.
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