An index fund is a group of stocks (or other investments) that aims to mirror the performance of an existing market index, such as the S&P 500. An index is made up of companies or securities that represent a part of the financial market. Some large indexes offer a look into the health of the economy as a whole.

Since these funds track an index, they are considered passively managed funds. Actively managed funds, like many mutual funds, have a manager who hand-picks investments in an attempt to beat the market.

Every time you buy a share of an index fund, the amount you invest is distributed across dozens, hundreds or even thousands of companies. This is known as “diversification.”

Making…