What does it mean for an index fund to “track the S&P 500”?
In: 5
A company called S&P (Standard and Poor’s) tracks the largest companies in the world. The term “S&P500” means the 500 largest companies.
An index fund effectively goes out and buys 1 share of each company on this list. So now whenever the values of companies on that list changes, the value of the fund also changes. ***Note****: this is oversimplified, and technically not how it works in reality, but I think this would help a 5 year-old understand the mechanics better.*
The idea is that it’s much easier for you to go buy 1 share of the index fund than it is for you to go buy shares from 500 companies separately. The fund handles the paperwork for you and charges you a small fee to cover the trading costs.
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