What exactly is an index fund?

Question

Will someone please explain to me what an index fund is-IN MORE OR LESS SIMPLE WORDS? I am young, but just trying to figure out the investment business. Thank you all answers.

Answer 1

http://www.sec.gov/answers/indexf.htm

Answer 2

In its simplist form an Index fund is a fund that maintains the same proportions of different stocks as a major index. In other words the fund collects money from the purchasers of the fund stocks. The fund takes that money and buys stocks that are found in the S&P 500 Index (or whatever Index it tracks) in the same proportion as they are found in the actual index.

Why would I want to do this? Because I don't have enough money to purchase all the individual stocks in the same proportion so I just buy shares of an Index fund and I get the the benefits of owning the index without having to spend major $$s. Also if there is an Index that has consistent returns that I think are good, I don't have to do any studying , I can just buys shares in the Index fund and let the Index managers do all the calculations as to which stocks should continue to be part of the index.

Below is a further description of the S&P 500 index to give you more insight into how indexes are formed.

Hope this helps

Pete

Definiton of S&P 500 index:

An index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.

Companies included in the index are selected by the S&P Index Committee, a team of analysts and economists at Standard & Poor's. The S&P 500 is a market value weighted index - each stock's weight in the index is proportionate to its market value.  



The S&P 500 is one of the most commonly used benchmarks for the overall U.S. stock market. The Dow Jones Industrial Average (DJIA) was at one time the most renowned index for U.S. stocks, but because the DJIA contains only 30 companies, most people agree that the S&P 500 is a better representation of the U.S. market. In fact, many consider it to be the definition of the market.

Other popular Standard & Poor's indexes include the S&P 600, an index of small cap companies with a market capitalizations between $300 million and $2 billion, and the S&P 400, an index of mid cap companies with market capitalizations of $2 billion to $10 billion.