How to Buy Index Funds: A Step-by-Step Guide

You buy index funds through a brokerage account, just like individual stocks

To buy an index fund, you open an account with a brokerage firm, deposit money, and place an order for the fund you want. The brokerage holds the fund in your account and handles all the paperwork. You do not buy directly from the fund company — you buy through a middleman (the brokerage), the same way you would buy a stock.

The process takes about 15 minutes to set up and a few days for your money to arrive. Once it does, you can buy or sell index funds in seconds during market hours. Most brokerages charge nothing to buy or hold index funds, though some funds themselves charge a small annual fee to cover their operating costs.

Key Takeaways

• You need a brokerage account to buy index funds; popular brokerages include Fidelity, Vanguard, Charles Schwab, and E*TRADE, and most charge no account fees.
• The account setup process takes 10 to 15 minutes and requires your Social Security number, address, employment status, and bank details for deposits.
• Money you deposit takes one to three business days to settle in your account before you can buy funds.
• Index funds charge annual fees (called expense ratios) that range from under 0.05% to 0.20% for most low-cost options, deducted automatically from your holdings.
• You can set up automatic monthly deposits to buy index funds on a schedule, which many investors use to build wealth over time.

Choose a brokerage and open an account

A brokerage is a company that lets you buy and sell investments. The major brokerages that cater to individual investors are Fidelity, Vanguard, Charles Schwab, E*TRADE, and TD Ameritrade. Each offers index funds from multiple fund families and charges no account fees or commissions to buy them.

To open an account, go to the brokerage's website and click the button to open a new account. You will answer questions about your name, address, Social Security number, employment status, and annual income. The brokerage uses this information to verify your identity and comply with federal law. The whole process takes 10 to 15 minutes. You will receive confirmation by email within a few minutes, and your account will be ready to use.

You do not need to choose between these brokerages based on which index funds they offer — all of them carry the major index funds from Vanguard, iShares, and Schwab. Choose based on which website or app you find easiest to use, or stick with whichever brokerage you already bank with if it offers investment accounts.

Deposit money into your account

After your account opens, you need to move money into it. The brokerage will show you options to link a bank account and transfer funds. You can transfer money from your checking or savings account at any bank — it does not have to be the same bank as your brokerage.

The transfer usually takes one to three business days. During that time, the money is in transit and you cannot buy funds yet. Once it arrives and shows in your account balance, you are ready to place an order. Some brokerages let you buy funds before the money settles, but most investors wait until the transfer is complete to avoid complications.

You can set up a recurring transfer if you want to invest the same amount every month. This is called dollar-cost averaging, and many investors use it to build their holdings steadily without trying to time the market.

Search for and select the index fund you want

Once money is in your account, log in to the brokerage website or app and look for the search or quote box. Type the ticker symbol of the index fund you want — for example, VOO for Vanguard's S&P 500 fund, or VTI for Vanguard's total stock market fund. The brokerage will show you the fund's name, current price, and annual fee (called the expense ratio).

Read the expense ratio carefully. A fund charging 0.03% per year costs $3 on every $10,000 you invest. A fund charging 0.50% costs $50 on the same amount. Over decades, that difference compounds into thousands of dollars. Most index funds from major providers cost between 0.03% and 0.20% per year.

The brokerage will also show you the fund's performance over the past year, five years, and since inception. Remember that past performance does not predict future results — what matters is that the fund tracks its index accurately and charges a low fee.

Place an order to buy the fund

Click on the fund to open its order page. You will see a box asking how much you want to buy. You can enter either a dollar amount (for example, $1,000) or a number of shares. Most beginners find it easier to enter a dollar amount — the brokerage will calculate how many shares that buys at the current price.

Choose whether you want to place a market order or a limit order. A market order buys the fund at whatever price it is trading at right now, and it executes immediately during market hours (9:30 a.m. to 4 p.m. Eastern time on weekdays). A limit order lets you set a maximum price you are willing to pay; if the fund does not reach that price by the end of the day, the order does not execute. For index funds, a market order is almost always the right choice because index funds do not move in price the way individual stocks do.

Review your order one more time, then click to confirm. The order executes instantly if you placed it during market hours. If you placed it after 4 p.m. or on a weekend, it will execute at the market open the next trading day. You will receive a confirmation email with the number of shares you bought and the total cost.

Understand what happens after you buy

After you buy an index fund, the brokerage holds it in your account. You own the shares outright — if the brokerage goes out of business, your shares are protected by federal law (the Securities Investor Protection Corporation, or SIPC, insures up to $500,000 per account). You can sell the shares anytime the market is open, and the money will return to your account within one to three business days.

The fund's price changes every day as the stocks inside it rise and fall. You do not need to do anything — the fund automatically rebalances itself to stay aligned with its index. If you set up automatic monthly deposits, the brokerage will buy more shares of the fund on the schedule you chose, without you having to place an order each time.

The fund will pay dividends (small cash distributions from the companies inside it) once or twice a year. By default, most brokerages reinvest these dividends automatically, buying more shares of the fund. This is usually the best choice for long-term investors because it compounds your returns.

Account types: taxable, IRA, and 401(k)

The type of account you open affects how your investments are taxed. A taxable brokerage account has no contribution limits and no restrictions on when you can withdraw money, but you owe taxes on any gains when you sell. An IRA (Individual Retirement Account) lets you contribute up to $7,000 per year (or $8,000 if you are 50 or older) and offers tax breaks — either you pay no taxes on gains until you withdraw in retirement (a Roth IRA), or you deduct your contributions now and pay taxes on withdrawals later (a traditional IRA). A 401(k) is offered through your employer and lets you contribute much more (up to $23,500 per year in 2024), often with an employer match.

Most brokerages let you open all three types of accounts. If you are just starting out, a taxable account is the simplest. If you have access to an employer 401(k) with a match, that is usually the best place to start because the match is assistance programs. An IRA is a good second step once you have maxed out any employer match.

Index funds work the same way in all three account types — you search, select, and buy them using the same steps. The only difference is the tax treatment and contribution limits.

Frequently Asked Questions

Do I have to buy a whole share of an index fund?

No. Most brokerages now offer fractional shares, meaning you can buy $50 worth of a fund even if one share costs $400. You simply enter the dollar amount you want to invest, and the brokerage buys the fractional share for you. This makes it much easier to start investing with small amounts of money.

What is the difference between buying an index fund and buying an ETF that tracks the same index?

Index funds and index ETFs track the same indexes and charge similar fees, but they work slightly differently. An index fund is bought and sold directly with the fund company at the end of each trading day. An index ETF trades on the stock exchange like a stock, so its price changes throughout the day. For most investors, the differences do not matter — both are low-cost ways to own a diversified portfolio. ETFs are slightly more tax-efficient in taxable accounts.

Can I lose money buying index funds?

Yes. Index funds own stocks, and stock prices go up and down. If you buy an index fund and the market falls, the value of your holdings will fall too. However, index funds are diversified across hundreds or thousands of stocks, so a single company's failure will not wipe out your investment. Historically, the stock market has recovered from every downturn, but past performance does not may provide future results.

Do I need a lot of money to start buying index funds?

No. Most brokerages have no minimum deposit, and fractional shares let you invest any amount you want. Many investors start with $100 or $500 and add to their holdings over time through automatic monthly deposits. The key is to start early so your money has time to grow.

What happens if I want to sell my index fund?

Log into your brokerage account, find the fund in your holdings, and click sell. Enter the number of shares or dollar amount you want to sell, place a market order, and confirm. The sale executes instantly during market hours, and the money returns to your account within one to three business days. You can then withdraw it to your bank account or use it to buy something else.