Saturday, December 18, 2010

Q: What Is An Index Fund?

A: An index fund is usually a mutual fund or exchange-traded fund that seeks to replicate the movement of a collection of individual stocks. The first known index fund was the S&P Composite Index Fund. Held within this particular index fund are all stocks characterized as US large-capitalization companies, 500 companies in total are held within this index fund, hence the name. Although there are different techniques to "indexing", the most common is traditional indexing. Traditional indexing involves holding a collection of all representative securities/stocks. The weight or how much to own of each security is determined by the ratio of the index being tracked. Furthermore, when a security is either added or deleted the index fund will modify its' holdings as well.

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