How to Start Investing in an Index Fund

Open a brokerage account and buy shares like you would any stock

To invest in an index fund, you open an account with a brokerage firm, deposit money, and place an order to buy shares of the fund you choose. The process takes about 15 minutes online. You pick a brokerage (Fidelity, Vanguard, Charles Schwab, and Merrill Edge are common choices), create an account, link a bank account or transfer money in, then search for the index fund by its ticker symbol and buy as many shares as you want.

The fund itself does the work of holding all the stocks in its index. You own a piece of that bundle. When you sell your shares later, you get back whatever they are worth at that moment. The brokerage holds your account, sends you statements, and handles the paperwork.

Key Takeaways

• You need a brokerage account to buy index funds; opening one takes 15 minutes and costs nothing at most major brokerages.
• Index funds are bought and sold during market hours just like individual stocks, and the price changes throughout each trading day.
• You can invest a lump sum or set up automatic monthly deposits, and most brokerages have no minimum investment requirement.
• Tax-advantaged accounts like IRAs and 401(k)s hold index funds and reduce what you owe in taxes on the gains.

Choose a brokerage and the account type that fits your situation

Most brokerages charge nothing to open an account and nothing per trade. The real difference between them is the research tools they offer, how their website works, and whether they have physical branches near you. Fidelity and Schwab have branches in most cities. Vanguard is known for low-cost funds. Merrill Edge is tied to Bank of America. All of them let you buy the same index funds.

You also choose what type of account to open. A taxable brokerage account is the simplest: you deposit money, buy funds, and pay taxes on any gains when you sell. A traditional IRA or Roth IRA lets you invest up to $7,000 per year (as of 2024, though this amount can change) and delays or eliminates taxes on the gains. A 401(k) through your employer works the same way but with higher limits. If you have access to a 401(k) at work, that is usually the best place to start because your employer may match part of what you contribute.

If you are not sure which account type fits you, start with a taxable brokerage account. You can always open an IRA later, and the money you invest in the brokerage account is not locked away.

Find the index fund you want to buy by searching its ticker symbol

Once your account is open and funded, you search for the index fund by its ticker — a short code like SPY, VOO, or VTI. The brokerage website has a search box where you type the ticker, and the fund appears with its current price. You can also search by the fund's full name, but the ticker is faster.

The price you see is the net asset value, or NAV — the value of one share of the fund. If the NAV is $400 and you have $2,000 to invest, you can buy 5 shares. You do not have to buy a round number; most brokerages let you buy fractional shares, so you could buy 5.5 shares if you wanted to invest exactly $2,200.

Before you buy, check the fund's expense ratio — the annual fee the fund charges, shown as a percentage. 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 lower the ratio, the more of your money stays invested.

Place your order during market hours and watch it settle

When you are ready to buy, you enter the number of shares you want and place an order. If you place the order during market hours (9:30 a.m. to 4 p.m. Eastern time on a weekday when the market is open), your order fills at the closing price that day. If you place it after hours or on a weekend, it fills at the opening price the next trading day.

After your order fills, the shares appear in your account. The transaction settles two business days later, meaning the money leaves your bank account and the shares are fully yours. During those two days, the shares are still in your account and you own them, but the settlement is not yet complete. You can sell them during this time, though most people just wait for settlement to finish.

Set up automatic investments if you want to invest regularly

Most brokerages let you schedule automatic monthly or weekly transfers from your bank account and automatic purchases of the same fund. This is called dollar-cost averaging — you invest the same amount on a regular schedule regardless of whether the fund price is high or low. Over time, this smooths out the effect of price swings.

To set this up, you go to the brokerage's settings, choose the fund, pick the amount and frequency, and link your bank account. The brokerage handles the rest. You can change or stop the automatic investment anytime. Many people find this easier than remembering to buy manually, and it removes the temptation to time the market or wait for a "better" price.

Understand what happens to your money after you buy

Once you own shares, the fund manager rebalances the holdings to match the index — selling stocks that have grown too large a share of the fund and buying ones that have shrunk. You do not do anything. The fund sends you dividends (usually quarterly) from the stocks it holds, and you can choose to reinvest those dividends automatically or take them as cash.

Your shares gain or lose value as the stocks in the index move. If the S&P 500 goes up 10%, a fund tracking the S&P 500 goes up roughly 10% minus its expense ratio. If it goes down 15%, your fund goes down roughly 15%. You see the current value of your shares anytime you log into your account.

You can sell your shares anytime the market is open. The brokerage sells them at the current price, and the money lands in your account two business days later. If you held the shares in a taxable account and they gained value, you owe capital gains tax on the profit. If you held them in an IRA or 401(k), you do not owe tax until you withdraw the money in retirement.

Avoid common mistakes that slow your progress

The biggest mistake is waiting for the "right time" to invest. The market is unpredictable day to day, but it has trended upward over decades. Investing $500 per month for 20 years beats waiting two years to invest $12,000 all at once. Start with whatever you have.

Another mistake is buying too many different index funds. If you own a total stock market fund and an S&P 500 fund, you are holding many of the same stocks twice. One broad fund is usually enough. A simple portfolio might be 70% total U.S. stock market and 30% international stock market, or 100% total stock market if you want to keep it even simpler.

Do not panic-sell when the market drops. Index funds are meant to be held for years. A 20% drop is normal and happens every few years. If you sell during a drop, you lock in the loss. If you hold, you recover when the market rebounds — which it always has, historically.

Frequently Asked Questions

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

No. Most brokerages have no minimum investment, and you can buy fractional shares. You can start with $100 or $500. The amount matters less than starting and staying consistent.

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

An index fund holds dozens or hundreds of stocks in one purchase, so you are diversified instantly. Buying individual stocks means you pick each one yourself and own only what you choose. Index funds are simpler and less risky for most investors.

Can I lose all my money investing in an index fund?

Theoretically, yes — if the entire stock market collapsed and never recovered. Historically, this has not happened. The U.S. stock market has recovered from every major crash. If you are investing for 10+ years, the risk is low. If you need the money in 2 years, index funds may not be right for you.

Should I invest in a taxable account or an IRA?

If your employer offers a 401(k) match, contribute enough to get the full match first — that is assistance programs. After that, a Roth IRA is often the best choice because gains are tax-free in retirement. A taxable account is useful once you have maxed out your IRA contributions.

How often should I check my account?

Once or twice a year is enough. Checking daily or weekly tempts you to react to short-term price swings. Index funds work best when you ignore the noise and let them sit for years.