What are index funds, and should your business invest in them?

An index fund is a group of stocks that have been grouped together into a portfolio that hypothetically represents a certain portion of the entire stock market. Some methods of indexing attempt to build portfolios that are a representative sampling of the entire market itself. Stocks are bought and sold according to an established criteria and are held in the portfolio so long as they continue to represent the index. Index funds usually rely on equations and models to remain up to date. As a result, the indexes themselves are managed by computer programs. Many times changes are made in real time.

Index funds are advantageous for many reasons. Because index funds are not managed by individuals the costs for participating in them is considerably lower. Due to the lack of "active" management, index funds have lower fees and taxable accounts. Index funds allow for average people or business owners who may not know much about the stock market or who are not willing to spend a lot of money to pay brokerage firms to make a relatively safe and hassle free investment. Some even argue that actively managed mutual funds on average do just as well as index funds. Another quality that makes indexes so appealing is that you as the investor passively benefits from whatever logic was used to make the index allocation decisions. Indexes are diversified so that they can efficiently balance downward trends in the market, and although returns are not as high with index funds alone, they are a safe option for investors who do not have the time or resources to rebound form stock market losses.

Index funds are available from many investment managers and are very common options for even skilled investors to have included in their portfolios. Some common indices include the S&P 500, the Wilshire 5000, the FTSE 100 and the FTSE All-Share Index. The most widely followed index is the S&P 500. The S&P or Standard & Poor's 500 is made up of 500 hand picked large companies through the processes mentioned above.

Of course there are disadvantages to every decision and investing in index funds is no different. It is important that you know the risks that are present so that you can make an educated decision that is best for your business. Also be aware that the period of time that you intend to leave your money in the market will be influential in the decisions that you make regarding where you will invest.

Indexes can never be entirely accurate in their representation of the market. A difference between the index and the various funds that it is meant to represent is called the "tracking error." Because index funds to not include active financial management services, customer's accounts are general and handled as a group and not to the specifications of any one investor. Yet, statistically, having to pay the fees associated with active portfolio management often counteracts the additional earnings, leaving the investor with about the same increase.

Whatever the flaws of an index fund, most investors include index funds as at least a small part of their entire investment portfolio and doing the same is most likely a wise decision for your business. Additionally consider all of the time and energy that it takes to run your business. An automated index fund that does most of the work for you is an excellent economical decision for the business person who wants to invest earnings wisely. Leaving your money in an index fund for the hopefully long life of your business will most likely yield earnings especially if that period is at least for 15 years. Investing in index funds is good business choice to ensure that your hard earned money starts working for you.