A Step By Step Guide To Index Investing 2024

If you want to generate passive income in the stock market the way that you're going to do it is by choosing to invest in what Warren Buffett calls his favorite investment or index funds index funds are a completely passive form of investing that everyone should consider doing and in this video I'm going to walk you through everything that you need to know about generating passive income in the stock market through index investing and we're going to start with the basics of what an index fund is all the way to a live example of buying index funds in everything in between every section is timestamp below in case you need to go back but without further Ado let's start with the basics of what is an index fund in order to understand what an index fund is I find it helpful to understand first what a stock is when you buy a stock like apple you are basically buying a single company which is identified by a ticker symbol in your your investment is based on that single company's performance whereas when you buy.

Index fund you are buying one ticker symbol that is composed of a group of stocks that mirrors a market index and an example of a market index is the SNP 500 which is composed of the largest 500 companies in the United States and in this video we're specifically talking about index funds that track the S&P 500 and so to put it in simple terms a stock is one individual company like apple or AAPL an index fund is One Fund composed of many companies like the Schwab S&P 500 Index Fund or swppx so now that we understand what an index fund is let's quickly talk about how an index fund works so as I just said when you buy an index fund you were buying one fund that mirrors a market index like the S&P 500 and so the performance of your index fund is based on the performance of the S&P 500 for example if the S&P 500 goes up 1% then your index fund will also go up 1% or if the S&P 500 goes down 1% then your index fund will also go down 1% it's very simple to understand in on average the market returns about 10 10%

Each year so if you have $1,000 invested you would gain $100 a year later however it's important to know that getting a return on your money in the stock market isn't guaranteed in some years you might lose money there's always going to be a risk with investing now this investment strategy comes with both pros and cons and so let's first talk about the pros of index funds now there are many Pros with choosing to invest in index index funds and the first pro is that it's a lower risk investment when you choose to invest in the stock market there is always some risk involved but choosing to invest in index funds is a little less risky because your investment isn't determined by a single company like a stock is but it's determined by many companies and some companies will do good While others will do bad but it's an average of those companies you're not going to lose 50% of your investment overnight now the second Pro is long-term growth potential now index investing isn't a get-rich quick scheme but it's something that takes time however the possibility of you getting a return on your investment is really high for example on average the stock market returns 10% a year so in 6 to 8 years you might double your money in the long term the chances of you getting a return on your investment are very high now the third Pro is that it's a passive form of investing when you buy an index fund your work is done you don't need to do anything else you don't need to check the market performance or research companies it doesn't require any of your attention.

All you need to do is buy and hold for the long term so those are some of the pros now next let's talk about the cons of index funds although index funds are great Investments there are some cons that you might want to consider in the first con is that you will not outperform the market now index funds are lower risk but they're also lower reward for example if you invested 5 years ago in an S&P 500 Index Fund you would have an 82% return but if you invested in Tesla 5 years ago you would have a 775 return you probably cannot beat the market but if you do want to try to beat the market you cannot do it through index investing now the second con is slow growth index investing is not a get-rich quick scheme I mean if you want to be a millionaire it's going to take you decades through index investing whereas with stocks it's possible in a shorter amount of time however it is extremely hard to find winning stocks even the smartest investors in the world have trouble outperforming the market which is why it's best to just stick with index funds and the third con is that it's boring if you're trying to spice up some things in your life you will not get that heat from index funds because index funds is very boring as I said index funds is passive it's Buy and Hold whereas stocks are active they change quicker and involve research so before investing in anything weigh the pros and cons of each and decide what's best for you and your lifestyle I personally choose to invest in index funds because I don't want to worry and stress about the market I am a passive investor but other people want a more active form of investing and so they choose stocks so now that we spoke about the pros and cons of index funds let's now talk about choosing the right Index Fund so now that you understand the basics of index investing you now need to choose an index fund to invest with and as of the date of this video here is a list of some of the most popular index funds on the market right now and as I explained earlier index funds track a market index and so in theory they should all produce the exact same result whatever the market.

Produces however there are some differences and so let's talk about the criteria to consider when choosing an index fund the first thing that you want to consider is the minimum investment amount depending on how much money you have to invest could limit which funds that you could buy for example the Schwab Index Fund has a minimum investment of $1 whereas the van guard Index Fund has a minimum investment of $3,000 the next thing that you want to consider is if there is a transaction fee now depending on which brokerage that you choose to invest with which we're going to talk about in a moment you could encounter a transaction fee which is a fee for purchasing shares for example if your brokerage is Schwab and you bought the Vanguard index fund you pay a fee of $74.95 whereas if you bought the Schwab Index Fund you'd pay no fees and you should never pay these fees and avoiding these fees is very easy all you have to do is whatever Index Fund you choose should also be your brokerage for example if you choose the Schwab Index Fund your brokerage should be Schwab or if you choose the Vanguard index fund your brokerage should be Vanguard that way you avoid the fee alt together now the third thing that you want to consider is the expenditure ratio now in order to invest in index funds you do have to pay a small fee because somebody is actively managing the index fund however these fees are very very low for example Schwab's fee.

2% or $2 for every $10,000 invested and vanguard's fee is .4% or 4 $4 for every $10,000 invested and ideally you want to keep this fee below 05% and the final thing that you want to consider is whether or not it's an index fund or an ETF now I'm not going to go in detail on ETFs but ETFs are very similar to index funds and unless you're trying to buy an ETF make sure the index fund you're buying is an index fund and again here is the list of some of the most popular index funds on the market today and so those are some of the things that you want to consider when choosing an index fund and when you have decided which index fund that you want to invest in now let's talk about opening a brokerage account so once you have decided which index fund that you want to invest in you next need to open something called a brokerage account which is basically an investment account and this is very very easy to do however I do want to say that this video is very centered around my American audience and if you were not an American watching this you most likely will not be able to open up account with these brokerages but to open a brokerage account all you need to do is go to a brokerage like Schwab Fidelity or Vanguard and open account and again depending on what Index Fund you choose to invest in should also be your brokerage so you avoid the transaction fee so if you choose the Schwab Index Fund use Schwab as your broker or if you choose the Vanguard index fund use Vanguard as your broker in my opinion I think that Schwab is a great brokerage because they have amazing customer service.

Interface is so good and they have so many different research tools if you want to use those but this is all done online and once you open up your brokerage account then you can now buy an index fund or buy whatever you want in the stock market and so now we can finally talk about buying an index fund now buying an index fund is an extremely easy thing to do and it's part of my monthly routine and so I'm going to walk you through how to buy an index fund we're going to buy $100 together now depending on what brokerage you choose the interface will look different but this is how you do it on Schwab okay so at the top here I'm going to click the all-in-one trade ticket right here which will take me to this screen and next I'm going to choose the account that I want to invest in which for me I'm going to choose my Roth IRA and as you see I have $100 to invest in that account so right here I'm going to type in the ticker symbol swppx which is the index fund I choose to invest in and I'm going to select action and click buy.

Type in right here $100 now let's stop here because I need to tell you something very important most index funds will ask you if you want to reinvest dividends in capital gains in what that means is that each year the index fund will give you a share of the profit which is called a dividend which you can reinvest or take now and what you decide to do is completely up to you but I always choose to reinvest because one it speeds up growth and two it is not tax until you withdraw so decide whether or not you want to reinvest the dividends so if you see for me it already says reinvest dividends in capital gain so I'm just going to click review order and then I'll just make sure all this stuff is good and then finally I will click place order and I will get my receipt and an important thing to be aware of is that stocks trade every second so you get the price the second you buy it but index funds trade once a day so you will get the price when the market closes at 400 p.m. eastern time and it's as simple as that and you are now an investor and everyone.

America from the janitor to the CEO is now working very hard to make you money and the final thing that you might be asking yourself is when do you sell the index fund now ideally you never want to sell because the point point of wealth is to have your money be growing over time so you don't have to worry as much about money and you could do more of what you want in life maybe when you retire if some big thing happens in life you might want to consider withdrawing but just because the market is up and you have made a profit doesn't mean that you should sell and also when the market is down and you're afraid of losing more money also doesn't mean that you should sell as we explained in this video index investing is a long-term investing it is a tool to build your wealth over time and beat inflation and that is it index investing is a great way to grow your money passively over a long period of time and I hope this video helped let me know in the comments and with that much.