Index Funds Warren Buffett, the greatest investor in the history of the stock market and one of the richest people in America is attributed as saying that “investors should know their limitations." There is a simple wisdom in that saying that applies to everyday life; know what you are able to do and what you can’t do, then do the things you can. Ask yourself, if you got a chance to fight with a grizzly bear, would you do it? You say that is crazy because the bear is bigger and would kill you? Ok, it’s probably an extreme example but you get the picture; you realize that you don’t have the ability to fight with a bear and you wouldn’t do it. Well, sometimes it is the same in the stock market and yes, there are people on Wall Street that successfully fight bears and bulls everyday with a great equalizer. Index funds give investors the tools they need to exceed their limitations.
What are index funds? An index fund is a type of mutual fund that keeps a stock portfolio designed to match the performance of a stock market or one of its stock sectors as measured by an index of selected stocks. Index funds are also known as market funds.
Why are index funds better than going alone? The vast majority of investors on Wall Street really do not know anything about investing. They don’t define their goals, they don’t learn stock charting and they refuse to perform fundamental analysis on companies before they buy. These are the same investors that don’t understand what happened when they lose their money. There are very few investors that, over the long haul, out-perform the results of the major indices like the Dow, the S&P 500 or the Vanguard Total Stock Market Index.
Index funds such as these and others give the average investor the ability to exceed his or her limitations. These funds are diversified portfolios and represent investment options in a portfolio with a size only a few investors could match. Because they have such a large portion of the market represented in their portfolios, it is extremely difficult to outperform index funds over the course of a year, let alone 10 or 20 years.
What if I want to do it on my own? That’s one of the beauties of the stock market; no one can tell you that you shouldn’t be playing the stock market. But if you hope to have success at it, you have to commit yourself fully to the endeavor. Winning the stock market game requires an understanding of the basics of stock market investing, a clear stock trading plan and the best resources available.
The first thing you need to do is start learning about the stock market. Start with Benjamin Graham’s book on defensive investing, then read anything you can about Warren Buffett. Both of these men are giants in the world of investing and because of their stature, their views demand a certain level of respect. Your learning should also include an ever-increasing understanding of the stock market terms and techniques of Wall Street. You need to understand Wall Street news and how Wall Street talks and acts in order to recognize its characteristics.
Second, you need to develop a plan for your investing. Define your goals and identify a course for getting there. Want to trade stocks? Make your plans accordingly. Prefer the idea of futures markets or options trading? Those are good possibilities as well. What are your stop loss strategies? Knowing these things will help you make a plan that increases your chances for success.
Finally, you need a stock trading system that will help you track your investments as well as your potential purchases. The best system for this is Japanese Candlesticks. This is a stock trading system with over three hundred years of use and it is far and away the best for tracking stocks and commodities as well as understanding the trends and patterns that occur in the market.
Conclusion For the average investor, nothing beats index funds. Index funds are simple, secure ways to invest and prosper in the stock market. Index funds allow the investor to relax, knowing that he or she is using the most consistently performing method in the stock market for investing. For the more daring investors, index funds might be a part of an investment philosophy that gives the investor complete control over his or her financial future. Whether investing on your own or taking advantage of index funds, you need to know your own limitations.
An index in a book helps us find a particular topic or subject within a big book, and similarly an index of stocks helps us to sample a much larger group of stocks, and to learn about the entire subject by watching just a portion of it. The indices are basically just lists of particular stocks that meet certain guidelines or criteria for being included in the index.
For example, the stocks that make up the Down Jones Industrials meet certain qualifications. They are stocks in industrial companies, and they are stocks that are traded on the Down Jones. Furthermore, the creators of the index choose them because of the way they tend to represent the other stocks that fall into those categories. So when they choose index stocks, it is sort of like choosing a political representative who shares the views of the other people from his or her town or region. Because the stocks and their companies change over time, the indices are also changed. The Dow Jones index will usually add a new stock or two each year, and let others drop out of the index. In this way the most appropriate stocks are kept in the index, and then those who watch the changes in the index can get a general idea of the movement of the whole Dow Jones market of stocks.
One of the most interesting things about these indexed stocks is that you can purchase shares of the index, without having to go out and buy each individual stock in the entire index. Lets say that for instance you like Dow Jones stocks. You can buy an index fund that invests in the funds found in the Dow Jones index. If the stocks on average go up, so will your investment in the fund that is tied to them. By buying the index you get diversity to protect you from losses and to help you take advantage of gains.
You can buy all sorts of index funds that participate in various types of stocks, because an index fund is sort of like a mutual fund that buys a particular type of stock. If you want to invest in the Japanese stock market or the London stock market, there are funds you can buy that are exclusively tailored for investors like you. And if you like transportation stocks, you can buy an index fund of transportation stocks. The same applies to stocks related to silver, gold, livestock, European currency, or a number of other different assets.There are even index funds to help you buy and sell based on the ups and downs of the market in options and futures.
To learn about index funds, and which ones might look like attractive investment vehicles for you, you can follow them in business newspapers. Or better yet, ask your local stockbrokerage firm to give you more information about index funds, and what sectors or areas of emphasis they participate in or target on behalf of their index fund stockholders.
Both Stephen Bigalow Bigalow & Jeff Lakie are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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