Index Funds

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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.

Source: Investopedia | Index Fund

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Disclosure: Alpaca does not make recommendations with regard to fractional share trading, whether to use fractional shares at all, or whether to invest in any specific security. A security's eligibility on the list of fractional shares available for trading is not an endorsement of any of the securities, nor is it intended to convey that such stocks have low risk. Fractional share transactions are executed either on principal or riskless principal basis, and can only be bought or sold with market orders during market orders.
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This is not an offer, solicitation of an offer, or advice to buy or sell securities, or open a brokerage account in any jurisdiction where Alpaca is not registered (Alpaca is registered only in the United States).

View Alpaca's disclosures at: https://alpaca.markets/disclosures

Alpaca does not make recommendations with regard to fractional share trading, whether to use fractional shares at all, or whether to invest in any specific security. A security’s eligibility on the list of fractional shares available for trading is not an endorsement of any of the securities, nor is it intended to convey that such stocks have low risk. Fractional share transactions are executed either on a principal or riskless principal basis, and can only be bought or sold with market orders during normal market hours.

The content on this website is for illustrative and informational purposes only and any historical returns, expected returns or projections are hypothetical in nature. Investing involves risk & investments may lose value, including the loss of principal. Past performance does not guarantee future returns or results. Before investing, carefully consider your investment objectives, time horizon, and overall risk tolerance as well as the information stated in the product offering prospectuses.