An index fund is a type of investment fund that aims to replicate the performance of a specific market index, such as the FTSE 100 or the S&P 500. The fund is created by buying a proportionate number of shares from each company in the index it tracks in order to match the overall performance of the index as closely as possible.
The idea behind index funds is instead of trying to pick individual stocks that will perform better than the market as a whole, investors can simply buy shares in a fund that tracks the market. This can be a more efficient and less risky way to invest, as it allows investors to gain exposure to a wide range of companies without having to research and select individual stocks.
Index funds have become increasingly popular in recent years, as more and more people have become aware of their benefits. One of the biggest advantages of index funds is that they tend to be cheaper than actively managed funds, as they have lower management fees and trading costs. This means that more of an investor's money goes towards buying shares, rather than being eaten up by fees. There are now many apps that can be used to trade index funds for free, such as Trading 212.
Another advantage of index funds is that they tend to be more diversified than actively managed funds. Because index funds aim to replicate the performance of a market index, they typically hold shares in a large number of different companies. This helps to spread risk across different sectors and companies, which can make index funds a less volatile option for investors.
In summary, index funds are a type of investment fund that track the performance of a market index. They are created by buying shares in companies that make up the index, in order to match the overall performance of the index as closely as possible. They are known for being a low-cost, diversified and easy way to gain exposure to a wide range of companies and sectors.
