What is an index?
These can either be funds which track the index of an entire market, such as the S&P 500 which tracks the top 500 US based companies and the UK’s FTSE 100, which tracks the performance of the UK’s largest 100 companies.
But indexes can also be sector specific – that means they track the performance of a particular industry. For example, the NASDAQ Biotechnology Index comprises approximately 200 firms in the biotechnology industry.
The tracking of price performances is facilitated through a standardized metric and methodology and are often used as benchmarks to evaluate a portfolio’s performance against. So, consider them as a hypothetical portfolio of securities representing a particular market or a segment of it.
When you invest in an index fund, you purchase a stake in all the companies that the fund invests in. When the fund is changed, such as if a stock moves out of the index and another moves in, your holdings change too.
- An index refers to a standardized way of tracking a basket of assets and securities within a particular area of the market
- Examples include the S&P 500, FTSE 100 and The Dow Jones
- Investing in a stock market index is a low-cost approach to investing whilst giving you the opportunity to diversify through one single fund
- There are two main ways to get started: By investing in index funds or by investing in ETFs
Investing in indexes through index funds and ETFs
The good thing about investing in a stock market index is that they provide a low-cost approach to investing whilst giving you the opportunity to invest in an entire index with just one fund. The low cost is due to not requiring a portfolio manager to sit there every minute of the day altering your portfolio. It is also an easy way to diversify your portfolio which as we know, is key to minimizing risk so it’s a great approach for beginners. There are two main ways to get started. And it’s easier than you think!
- Index funds: Investing in an index fund, such as the FTSE 100, can be done by picking a provider that sells them – for example, Vanguard. All you need to do is sign up to a provider, input the amount of money you want to invest, then search and choose the index you want to purchase a stake in. How easy is that?! Once you have made the investment, you can make alterations to your portfolio.
- ETF: So, what the F*** is an ETF? Well it stands for Exchange Traded Funds which are traded directly through a stock exchange. This means you can buy and sell them at any point in the day. You can hold most ETFs in an investment ISA which means you won’t get taxed on capital gains. To do this, you can do this through a cost-effective online broker or fund platform and the entire buying process takes a matter of minutes. There is a small fee involved which will vary depending on the platform you decide to use. So consider that first!
By now, you may have heard of the S&P 500 Index. This is the world’s most renowned benchmark for the stock market as it makes up a large proportion of the stocks traded in the United States. Other prominent indexes from the US include Dow and Jones Industrial Average Index, the Nasdaq 100 Index, Wilshire 5000 Total Market Index, MSCI EAFE Index, and the Bloomberg US Aggregate Bond Index.
The FTSE 100 is the UK’s leading index which represents the 100 top performing companies traded on the London Stock Exchange.
Meanwhile Cac-40 is France’s main index and Dax Performance Index is Germany’s. Others include the RTS Index – an index of 50 Russian stocks traded on the Moscow Exchange.
But if you want to have a global perspective of the stock market, you can look into the the FTSE Global Equity Index Series which includes over 16,000 companies