How do I Invest in Index Funds?

Investing in the stock market does not require enormous sums of money or the financial expertise of a renowned portfolio manager. Those luxuries are nice, but you can generate profits simply by investing slowly into index funds while avoiding some of the more complex fee structures associated with sophisticated investment vehicles. To invest in index funds, you will need some startup capital or money and access to a stock brokerage firm. You also will need to decide on the type fund into which you want to invest.

After you settle on a type of index fund, you can retain a stock broker to help you with your options. This can be accomplished online or by going to a brokerage house. The broker will allow you to invest in index funds through either a mutual fund or an exchange traded fund (ETF). Some mutual funds allow you to invest directly, but you will have to research the individual fund to determine what your options are.

To invest in index funds offered by a mutual fund company, you might have to invest a minimum amount. That minimum requirement might be waived if you sign up for an automatic investment program, which deducts funds from your financial account on a regular basis to invest in the fund. These individual mutual funds are designed to perform similarly to another, broader index in the stock market, and you can expect to earn returns that are similar to those of the broader market index. For instance, in the U.S., an index fund might be designed to replicate performance in the Standard & Poor's (S&P) 500 index, which is a broad representation of the stock market in the country.

An ETF is similar to a mutual fund index fund because it represents many different stocks, but it also trades in the stock market on its own with an assigned value. As a result, you must purchase and sell shares of an ETF the same way that you would buy or sell individual stocks, and that is through a stock broker. You will be charged fees for each buy order or sell order that you make when you invest in index funds that are also ETFs.

Invest in index funds with the understanding that these investment vehicles are passively managed. This means that unlike in the case of actively managed funds, there is not a professional investment advisor making changes to the portfolio each day in response to market activity. Instead, the securities that comprise the index fund are changed only periodically and in response to some conditions, such as severe and sustained declines in the value of a stock. Your expectations for profits should be aligned with the historical performance of the particular index in which you choose to invest.