-
Step 1
Decide what stock market index you want your investment to follow, and how much you want to invest. You might choose to follow more than one, investing some of your money in a broad index like the S&P 500 and other amounts in specific index funds that track different things such as other countries' stock market performance, or the performance of a certain segment of the market such as an index of utility stocks or gold mining company stocks. Just as with any stock market investment, there's always a risk that a fund will go down as well as go up, depending on how well a segment of the market performs, so diversification is good, especially if you're planning to use index funds that follow segments of the market that are highly volatile.
-
Step 2
Look for no-load index funds that follow the particular index you're interested in. A link to a list of index funds that follow some of the well-known indexes is below in the "resources" section, but you can also search and find index mutual funds or index ETFs (exchanged traded funds, which you can buy and sell like stocks) that are designed to follow many different indexes.
-
Step 3
Look up the performance of the funds you're interested in. This can be found on the homepage of the fund company or at other fund-ranking sites on the internet. Check to see that the fund has been following its target index closely, and also check the expense ratio. Every index fund has expenses, but because you're not paying for active management, the lowest expense ratio is generally the best. You can find index funds with annual expenses of under a tenth of a percent. The expenses are automatically deducted from the fund's performance, so you don't have to pay them separately, but a low expense ratio means that more of the fund's money is going toward investing in stocks rather than paying salaries.
-
Step 4
Check to make sure the minimum investment required in the fund is less than the amount you want to invest. The largest funds with the lowest expense ratios may require high minimum investments. Some index funds allow you to start small, and a slightly higher expense ratio may be well worth the benefit of being able to invest a small amount.
-
Step 5
Once you've decided what index funds to invest in, purchase no-load index funds directly through the fund's website or by phone or mail, and you won't have to pay any sales charge. You can also purchase them through a stock broker, for a paperwork fee that's still less than a load fund's sales charge. Index ETFs will require opening an account with a stock broker and paying a commission as if you were buying stock.
