What are index funds and what’s the difference between them and regular stock trading?
In: Economics
Regular stock trading is buying specific stocks (Boeing, Ford, Amazon, etc.). If those companies do well, you do well. If they crash and burn, you don’t.
An index fund buys shares in the same proportion as they are in major stock indexes, like the Dow Jones Industrial Average (“the Dow”) or the S&P500, so the value of the fund tracks the value of the index. Since these are large and cover many companies, you’re not entirely exposed to the success or failure of any one company. And since the stocks in the fund are simple math, their overhead expenses are very low (there’s no active fund management team to pay). As a result, they’re less risky than most individual stocks and well diversified without thinking very hard or paying a fund manager.
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