How an index fund works
An index fund buys the companies in a market index. For example, an S&P 500 index fund tracks about 500 large US companies. It copies the index instead of having a manager pick stocks, so it’s often called a “passive” fund.
Why people like them
Index funds are diversified and usually have low fees. They still rise and fall with the market, so profits are not guaranteed, and a fund’s past returns don’t promise future ones.
Expense ratios
The yearly fee is called the expense ratio. Multiply it by the amount invested to see the cost. Lower fees leave more money growing for you.
Dollar-cost averaging
Dollar-cost averaging means investing the same amount on a regular schedule, which buys more shares when prices are low and fewer when they’re high.
A note on retirement accounts
At work, a 401(k) is a retirement account, and some employers “match” what you put in, up to a set percent of your pay. Match rates and vesting rules differ by plan, so check your own.