Why Invest in an Index and What Is It Exactly?

Why Invest in an Index and What Is It Exactly?

11/5/2021

Does it seem like investment advisors are speaking a foreign language the moment they mention the word 'index'? What does that word actually mean, and why is an index so important for investors?


An index, in simple terms, is an indicator of the performance of a group of companies that meet certain qualitative parameters (size, economic sector, geography...).

It can be likened to a soccer team. Each player has their qualities and role. When one player gets injured, we substitute them with another. The goal is to keep the team equally strong.

Index funds are a type of investment funds that are tied precisely to an index. Simply put: when you 'put money into it,' it is used to invest in all the companies that make up that index. This allows for a more diversified portfolio than if you were buying individual stocks.

S&P 500, Nasdaq 100, MSCI World Indexes

In 1926, the S&P 500 index was created, one of the oldest and most efficient indexes globally, encompassing the largest and best American companies. Companies are selected based on strict qualitative parameters by the Commission that compiles the S&P 500 index.

The index includes only companies with high market capitalization (large to gigantic firms) and high volumes of traded shares. Furthermore, it is required that the companies be based in the USA and that the majority of shares be publicly tradable. The index reached its low point on March 20, 2020, dropping by 34%, but since then, it has been steadily rising, increasing its value by 76%. While the index fluctuates, historically, its long-term return is around 10% per year.

Advantages of Investing in Index Funds:

And it's precisely for these reasons that we monitor them and gladly invest in them with our clients...

Would you be interested in how index funds could enrich your portfolio as well?

Do not hesitate to contact us

Contact

Ing. Petra Štěpánková, MBA, EFA

+420 604 218 602

petra@meliorinvest.cz

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