An index fund is a copycat. It mimics the holdings and performance of a particular stock index, which we covered in the previous bite. For example, if you buy a S&P 500 index fund, you are purchasing ownership into a variety of 500 large companies.
Owning an index fund is different from owning a single stock. Owning a single stock is like owning a cow. Owning an index fund is like owning the herd. There is less risk that comes with a herd since there is a power in numbers.
Index funds are most similar to ETFs. They both provide a great way to diversify your portfolio and have an expense ratio. The difference between the two is that index funds are strictly passively managed investments. This means that the managers of the fund can sit back and relax since the index fund will track a stock index. An actively managed investment, on the other hand, requires the managers to be actively engaged in order to capture greater gains. ETF can be both and you will find that some securities use the terms interchangeably.
Due to index funds being passively managed, they come with lower expense ratios. Actively managed funds come at a higher cost because the managers are actively trying to make the fund more money than the average.
The famous investor, Warren Buffett, is known for recommending index funds as a strong long term investment. Index funds in the short term do not provide as large of gains as a single stock, but can accumulate over time to beat out most investors' returns. If you like the idea of buying and holding, then you might want to look into buying a herd.