Index funds can be a low-cost, low-risk way for investors, especially first-timers, to get into the market. But what exactly are they?
You can think of an index fund as a basket of stocks with hundreds or thousands of different ones inside, explains Nick Holeman, a certified financial planner at Betterment. The S&P 500, for example, is a fund that holds stocks for the 500 largest companies in the U.S., which includes familiar names such as Apple, Google, Exxon and Johnson & Johnson.
"It's the cheapest and easiest way to diversify your money that you're investing," Holeman says.
Think of it this way: If every individual stock were a Lego brick, buying an index would be like getting a set of Legos that includes one of every color, explains Andy Smith, a CFP at Financial Engines.
"Instead of saying, 'I want this piece and this piece and this piece,' you're getting every big piece that's out there," he tells CNBC Make It.