Stocks
Young Fools
March 25, 1998

What are Index Funds?

An index fund is a mutual fund which doesn't keep buying and selling different companies. It defines a group of stocks -- an index -- and then buys and holds them all, no matter how they do.

The most famous stock index is probably the Dow Jones Industrials. I'm sure you've heard a TV news anchor say, "The Dow was up 40 points today," or some such. When people refer to "The Dow" or "The Dow Jones Industrial Average," they are really referring to 30 of the country's biggest companies. These include Sears, Hewlett-Packard, J. P. Morgan (a bank/financial company), Philip Morris (a cigarette/food company), International Paper, IBM, and Johnson & Johnson. Solid, established companies like these are often referred to as "blue-chip" stocks. Companies in the Dow are picked by Dow Jones & Co., publisher of The Wall Street Journal.

It's interesting that most people think of the Dow as the most important measure of how the market is doing. This might not be the best thing to do, since the Dow really represents just 30 stocks out of thousands of stocks that are out there.

Another important index is the 500 companies tracked by Standard & Poor's. Standard & Poor's Corporation, part of McGraw-Hill, is an investment advisory service that publishes financial data. These 500 are among the country's largest companies, and they're called the "S&P 500." An S&P 500 Index fund will hold stock in all 500 of these companies.

The S&P 500 is perhaps the best benchmark for investors to compare their results to. You want your stock investments, whether they be individual stocks that you choose yourself or a mutual fund, to at least match the S&P 500 return. If they do worse, you might as well invest in the Index fund. You'd be better off!

Stocks

What is Stock?
The Case for Stocks
Stock Prices and Value
How Do Stocks Move?
Dividends
What are Mutual Funds?
What are Index Funds?
Stock Splits