How to Start Investing in Index Funds

You buy index funds the same way you buy individual stocks: through a brokerage account

To invest in an index fund, you open an account at a brokerage firm, deposit money, and place an order for the fund you want. The brokerage holds your shares and handles the paperwork. Most brokerages charge no commission to buy or sell index funds, and many have no account minimum or a minimum as low as $1. The entire process takes about 15 minutes online.

The main decision is which brokerage to use. The largest and most straightforward for individual investors are Fidelity, Vanguard, Charles Schwab, and E*TRADE. Each offers hundreds of index funds to choose from, and each has a website and mobile app where you can research funds, read their prospectuses, and place trades yourself. You do not need a financial advisor or a large sum of money to start.

Key Takeaways

• You open a brokerage account online, deposit money, and buy index fund shares just as you would buy a stock — the whole process takes minutes.
• Most brokerages charge no commission on index fund purchases and have no account minimum or a very low one.
• The fund you choose depends on what you want to track: the S&P 500, the total U.S. stock market, international stocks, bonds, or a mix.
• Tax-advantaged accounts like IRAs and 401(k)s hold index funds and are often the best place to start investing.
• Index funds are passive — you buy them and hold them, which means you spend far less time managing your portfolio than you would with individual stocks.

Choosing a brokerage

A brokerage is a company licensed to buy and sell securities on your behalf. You give them money, they hold it in an account under your name, and you tell them what to buy. The major brokerages for individual investors all offer similar features: zero-commission trading, research tools, mobile apps, and customer support. The differences are small enough that you can choose based on which website feels easiest to use or which one your employer uses for retirement accounts.

Fidelity, Vanguard, and Schwab are the largest and have the longest track records. Fidelity and Schwab are full-service brokerages that also offer checking accounts, credit cards, and advisory services if you want them later. Vanguard is owned by its clients and is known for low costs. E*TRADE is owned by Morgan Stanley and is popular with active traders, though index fund investors do not need its advanced tools. Open an account at whichever one appeals to you — you can always move money to a different brokerage later if you change your mind.

Opening an account and depositing money

Go to the brokerage's website and click "Open an Account" or "get your free guide". You will enter your name, address, Social Security number, and employment information. The brokerage will verify your identity and typically approve you within minutes. You then link a bank account so you can transfer money in.

Most brokerages let you start with any amount — even $100. Some have no minimum at all. Once your account is open and you have transferred money from your bank, that cash sits in your account ready to invest. You do not have to spend it all at once. Many investors set up automatic transfers from their checking account to their brokerage account each month, the way they might contribute to savings.

Selecting which index fund to buy

Every brokerage offers dozens of index funds. The most popular are funds that track the S&P 500 (500 large U.S. companies), the total U.S. stock market (roughly 3,500 companies), and the total international stock market. Vanguard, Fidelity, and Schwab each have their own versions of these funds, and they all work the same way — you own a tiny piece of every company in the index.

The funds differ in their expense ratio, which is the annual fee the fund company charges to manage it. For index funds, this is usually between 0.03% and 0.20% per year. That means on a $10,000 investment, you pay $3 to $20 per year. The difference sounds small, but over decades it adds up. Vanguard's S&P 500 index fund (ticker: VFIAX) has an expense ratio of 0.04%. Fidelity's (FSKAX) is 0.015%. Both are extremely cheap. You can compare expense ratios on each brokerage's website before you buy.

If you are unsure which fund to pick, a total U.S. stock market index fund is a reasonable starting point. It gives you exposure to thousands of companies across all sizes and sectors, which means you are not betting on any single industry. If you want to add international stocks or bonds later, you can buy additional funds.

Placing your first order

Once you have chosen a fund, log into your brokerage account and find the "Trade" or "Buy" section. Enter the fund's ticker symbol (a short code like VFIAX or FSKAX), the number of shares you want to buy, and review the order. The brokerage will show you the current price per share and the total cost. Click "Confirm" or "Submit", and the order executes immediately during market hours (9:30 a.m. to 4 p.m. Eastern time on weekdays). If you place an order after market close, it will execute the next morning.

You will see the shares appear in your account within seconds. You now own a piece of every company in that index. The fund will continue to hold those shares until you decide to sell them. You do not have to do anything else — the fund automatically reinvests dividends (small cash payments companies make to shareholders) back into more shares of the fund, so your investment grows without any action on your part.

Tax-advantaged accounts: where most investors should start

A regular brokerage account is straightforward, but a tax-advantaged account is usually better for long-term investing. The most common are an IRA (Individual Retirement Account) and a 401(k) (an employer-sponsored retirement plan). Both let you invest in index funds, but the money grows without being taxed each year. You only pay taxes when you withdraw the money in retirement.

If your employer offers a 401(k), that is often the best place to start because many employers match a portion of what you contribute — assistance programs. You choose how much to contribute from your paycheck, and the employer deposits it directly into your 401(k). You then choose which investments to buy inside that account, and index funds are almost always an option.

If you do not have access to a 401(k), you can open an IRA at any brokerage. You can contribute up to $7,000 per year (the limit changes occasionally). A Roth IRA lets you withdraw money tax-free in retirement. A Traditional IRA gives you a tax deduction now and you pay taxes when you withdraw. Both let you invest in index funds. Open the IRA at the same brokerage where you plan to buy the fund, and the process is the same as opening a regular account.

What happens after you buy

Index funds are passive investments, which means you buy them and hold them. You do not need to check the price every day or make changes based on market news. In fact, most index fund investors are better off ignoring short-term price swings. The fund's value will fluctuate with the market, but over decades the broad market has historically trended upward.

Many investors set up automatic monthly contributions to their index fund account. This is called dollar-cost averaging — you invest the same amount each month regardless of whether the market is up or down. Over time, this smooths out the effect of market timing and removes the temptation to buy high or sell low based on emotion.

If you have questions about your account or the fund, every brokerage offers customer support by phone, email, or chat. You can also read the fund's prospectus — a document that explains exactly what the fund holds, its fees, and its performance history. The prospectus is free and available on the brokerage's website.

Frequently Asked Questions

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

No. Most brokerages have no minimum or a minimum of $1 to $500. You can open an account and buy a single share of an index fund if that is all you have. Many investors start small and add money over time through automatic monthly contributions.

What is the difference between buying an index fund and buying individual stocks?

An index fund gives you ownership in hundreds or thousands of companies with a single purchase. A stock gives you ownership in one company. Index funds are simpler, more diversified, and require far less research and monitoring. Most individual investors do better with index funds than trying to pick individual stocks.

Can I buy index funds inside a 401(k) or IRA?

Yes. In fact, that is where most investors should hold index funds because the money grows without being taxed each year. When you open a 401(k) or IRA, you choose which investments to buy inside it, and index funds are almost always available as an option.

How often should I check on my index fund investment?

You do not need to check it often. Many successful index fund investors check their account once or twice a year. Checking too frequently can tempt you to make emotional decisions based on short-term price swings. Set up automatic contributions if you can, and let the fund do its job.

Can I sell my index fund shares whenever I want?

Yes, if the fund is in a regular brokerage account. You can sell any time the market is open and the money will be in your account within a few days. If the fund is in a retirement account like an IRA or 401(k), you can still sell, but you will owe taxes and penalties if you withdraw before age 59½ (with some exceptions). That is why retirement accounts are best for money you do not plan to touch for many years.