How to Purchase Index Funds
An index is a good way to gauge the direction of the stock market, especially within a particular exchange. Three popular indexes are the Dow Jones Industrial Average (DJIA), the S&P 500 and the Nasdaq 100. Index mutual funds try to match the performance of stock returns on the exchange. For instance, an index fund based on the S&P 500 will aim to replicate its returns. Index fund managers invest in the same 500, 30 and 100 stocks found in the S&P 500, DJIA and Nasdaq 100 indexes, respectively.
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Instructions
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Start by researching index funds you're interested in. Go to Yahoo! Finance's Mutual Fund Screener (see Resources).
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Select the index you would like to track. The DJIA traditionally tracks "industrial" or mature stocks. The Nasdaq generally follows high technology and growth stocks, while the S&P 500 generally tracks stocks of companies with small or midsized capitalization. With the Yahoo! screener, look at the fund's performance returns for one, three and five years.
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Compare expense ratios. Index funds can be similar except for the expense ratio, so this is a very important point of comparison before making your purchase. Index funds are not actively managed, so the expense ratio should be lower than that for manged funds. The average expense ratio for mutual funds ranges anywhere from 1.3 to 2 percent, whereas for index funds it's usually less than .5 percent.
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When you've chosen an index fund to invest in, contact your stockbroker or open an investment account online. Most mutual fund companies, like Fidelity and Vanguard (see Resources), offer an index fund that tracks the DJIA, S&P 500 or Nasdaq. One example is the Vanguard 500 Index Fund, which tracks the S&P 500. Fund company websites let you research a particular fund. You can also ask your broker or bank for suggestions about funds.
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Also consider ETFs (exchange-traded funds). These are much like index mutual funds but trade throughout the day like a stock. Consider the Standard & Poor's Depositary Receipts (SPDR) or the iShares S&P 500 Index, two ETFs that track the S&P 500.
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