An index is quite simply a basket of shares. It can be a small basket – like the shares of the 30 companies in the Dow Jones Industrial Average or it can be a big basket, like the shares of the 500 companies in the S&P 500.
An index fund is a fund is a way to invest in that basket of shares, without buying each individual stock.
Say an investor, let’s call him Jimmy – is a big believer in technology. He might decide to put money into a fund that tracks the NASDAQ index. That fund has bought shares in every company in the NASDAQ. So if the NASDAQ goes up, Jimmy’s investment grows, and if the NASDAQ does badly, Jimmy’s investment shrinks.
The great thing about index funds is that the work of picking stocks is done automatically and that means you don’t have to pay big fees for a manager. You also don’t have to worry about missing out on a huge market rally.
Although a big correction could leave you needing drink.