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

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

To own an index fund, you open an account at a brokerage firm, deposit money, search for the fund by its ticker symbol, and place an order. The brokerage holds the fund in your account and handles the paperwork. You can buy most index funds for as little as one share, which might cost anywhere from $50 to $400 depending on the fund. Some brokerages let you buy fractional shares, so you can invest smaller amounts.

The whole process takes minutes once your account is open. The hard part is not the buying — it is choosing which brokerage to use and which index fund to buy. Those decisions depend on what you are investing for, how much you have to start with, and whether you want to manage the account yourself or have someone else do it.

Key Takeaways

• You need a brokerage account to buy index funds; opening one takes 10 to 20 minutes and requires a Social Security number, address, and initial deposit.
• Index funds trade during market hours like stocks do, so your order executes at the price the fund is trading at when you place it, not a price you set in advance.
• Brokerages charge different fees — some charge per trade, some charge account maintenance fees, and some charge nothing but make money other ways.
• You can buy index funds inside a retirement account like a 401(k) or IRA, which often gives you tax advantages that make the investment more valuable.
• If you do not want to pick funds yourself, a robo-advisor will build and manage a portfolio of index funds for you based on your age and goals.

Opening a brokerage account

A brokerage account is simply a holding place for your investments. You open one by going to a brokerage's website, filling out personal information, and linking a bank account or sending a check. The brokerage will ask for your name, address, Social Security number, employment status, and investment experience. This information is required by law, not because the brokerage is being nosy.

Common brokerages include Fidelity, Schwab, Vanguard, E*TRADE, and Robinhood. Each one has a different website, different fees, and different tools. Some are better for beginners, some for people who trade a lot, and some for people who want to invest small amounts. Once your account is open and money is in it, you can buy index funds immediately — there is no waiting period.

You will also choose what type of account to open. A taxable brokerage account has no contribution limits and no tax breaks, but you pay taxes on gains and dividends each year. A retirement account like an IRA or 401(k) lets you invest money that reduces your taxes now, and you do not pay taxes on gains until you withdraw the money in retirement. If your employer offers a 401(k), that is often the cheapest and easiest place to start.

Finding and ordering the index fund you want

Once money is in your account, you search for the fund by its ticker symbol. An index fund's ticker is a short code — VOO for the Vanguard S&P 500 ETF, VTI for the Vanguard Total Stock Market ETF, or BND for the Vanguard Total Bond Market ETF. You type the ticker into your brokerage's search box, and the fund appears with its current price, performance history, and holdings.

You then decide how many shares to buy. If VOO is trading at $400 per share and you have $2,000 to invest, you can buy 5 shares. Some brokerages also let you buy fractional shares — so you could invest exactly $2,000 and own 5.00 shares instead of having $0 left over. Once you enter the number of shares and click "buy" or "place order", the trade executes at whatever price the fund is trading at that moment. You cannot set a price in advance the way you might with a stock.

The order settles in one to two business days, meaning the brokerage transfers the shares to your account and the money leaves your bank account. Until then, the shares are on order but not yet yours. After settlement, you own the fund and will receive dividends and capital gains distributions automatically.

Understanding brokerage fees and costs

Brokerages make money in different ways, and the way they make money affects what you pay. Some charge a flat fee per trade — say $5 or $10 every time you buy or sell. Some charge account maintenance fees if your balance is below a certain amount. Some charge nothing on trades but make money by lending out your shares or paying less interest on cash in your account. A few charge a percentage of your assets under management.

Index funds themselves also have fees, called expense ratios. An expense ratio is a yearly percentage charged by the fund company to cover the cost of running the fund. A fund with a 0.03% expense ratio charges $3 per year on every $10,000 you invest. A fund with a 1% expense ratio charges $100 per year on the same $10,000. Over decades, this difference compounds — a 0.03% fund will leave you with significantly more money than a 1% fund, all else equal.

When you are choosing a brokerage and a fund, look at both the brokerage fees and the fund's expense ratio. A brokerage with no trading fees but high account minimums might not be right for you if you are starting small. A fund with a very low expense ratio might be worth buying even if the brokerage charges a small fee per trade.

Buying index funds inside retirement accounts

If your employer offers a 401(k), you can buy index funds inside it by choosing them from the plan's investment menu. Your employer deducts money from your paycheck before taxes, so you reduce your taxable income. The money grows tax-free until you retire and withdraw it. Many 401(k) plans offer index funds as options, though some offer only actively managed funds or a limited selection.

If you do not have a 401(k) or want to invest more, you can open an IRA — either a Traditional IRA or a Roth IRA — at any brokerage. A Traditional IRA lets you deduct contributions from your taxes in the year you make them, and you pay taxes when you withdraw in retirement. A Roth IRA takes money after taxes, but withdrawals in retirement are tax-free. You can contribute up to $7,000 per year to an IRA (the limit varies by year), and you can buy any index fund the brokerage offers.

Retirement accounts are almost always the best place to start because the tax advantages are powerful. If you have money left over after maxing out your retirement account, then you can open a taxable brokerage account and buy index funds there.

Using a robo-advisor if you do not want to pick funds yourself

A robo-advisor is a service that builds and manages a portfolio of index funds for you. You answer questions about your age, income, goals, and how much risk you can handle. The robo-advisor then creates a mix of index funds — say 70% stock index funds and 30% bond index funds — and automatically rebalances it over time to keep it on track.

Robo-advisors include Betterment, Wealthfront, and Vanguard Personal Advisor Services. They typically charge between 0.25% and 0.50% per year of your assets under management, though some have account minimums. For someone with $10,000 invested, that might be $25 to $50 per year. In exchange, you do not have to think about which funds to buy or when to rebalance — the service does it for you.

A robo-advisor is useful if you do not want to learn about index funds or do not have time to manage your account. It is less useful if you already know what you want to buy or if you have a very small amount to invest, because the fees might outweigh the benefit. Many people start with a robo-advisor and move to picking their own funds later once they understand how it works.

What happens after you buy

Once you own an index fund, you do not have to do anything. The fund automatically reinvests dividends and capital gains back into itself, so your shares grow over time. You can check your balance whenever you want, but checking every day is pointless — index funds are meant to be held for years or decades, not traded in and out.

If you want to add more money, you can deposit it into your brokerage account and buy more shares of the same fund or a different one. If you want to sell, you place a sell order just like you placed a buy order, and the money goes back into your account. You can then withdraw it to your bank account or use it to buy something else.

The only real decision you make after buying is whether to add more money regularly — say $500 per month — or to add money only when you have it. Regular investing, called dollar-cost averaging, takes the guesswork out of timing and is a common way people build wealth over time.

Frequently Asked Questions

Can I buy an index fund with just $100?

Yes, if the brokerage offers fractional shares or if the fund's price per share is $100 or less. Some brokerages let you invest any dollar amount and automatically buy a fraction of a share. Others require you to buy whole shares, so you would need enough money for at least one full share. Check your brokerage's rules before opening an account.

Do I have to buy index funds through a brokerage, or can I buy them directly from the fund company?

You can buy directly from some fund companies like Vanguard or Fidelity if you open an account with them. Buying directly and buying through a brokerage are essentially the same thing — the fund company is the brokerage in that case. The advantage of a dedicated brokerage is that you can hold funds from many different companies in one place.

What is the difference between an ETF and a mutual fund index fund?

Both track an index, but they trade differently. An ETF trades during market hours like a stock, so you see the price change throughout the day and can place limit orders. A mutual fund trades once per day after the market closes, and you get whatever price it closes at. For most beginners, the difference does not matter much — both are cheap and effective ways to own an index.

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

No. Many brokerages have no account minimum, and fractional shares let you invest small amounts. You can start with $50 or $100 if that is what you have. The key is to start early and invest regularly, because time in the market matters more than the amount you start with.

Can I lose money in an index fund?

Yes. If the market drops, the value of your index fund drops too. But index funds are diversified across many companies, so they are less risky than owning a single stock. Over long periods — 10 years or more — stock index funds have historically recovered from drops and gone on to new highs, though past performance does not may provide future results.