What Is an Index Fund?
An index fund is a fund designed to follow a particular group or index of investments.
Buying one share vs a fund
🏢 One share
You own an interest in one company.
📦 An index fund
Your money can be spread across many companies or investments.
Not every index fund is identical — they can follow different groups of companies.
Diversification
"Don't put all your eggs in one basket." Spreading money across different investments can reduce the impact of any one investment performing badly.
Diversification does not remove all risk — an entire market can still fall.
Tracking a group of investments
An index is a way of tracking a group of investments. An index fund aims to follow that index.
An index fund designed to follow this pretend index would invest across all five companies at once.
Fees
Funds can charge fees for managing the investments inside them. We won't go into specific products or providers here — just know that fees are part of how funds work.
One company or twenty?
You have $100. Option A: put it all into one company. Option B: spread it across 20 companies through a fund. What might happen if one company performs badly?
With Option A, a bad result for that one company affects your whole $100. With Option B, one company performing badly only affects a small part of your $100 — but the whole fund can still fall if the wider market does.
This is an introduction to the concept of diversification, not investment advice.
Where to next
More on shares and companies.