An index is a group of stocks, the performance of which is measured as a whole. Some are large, containing hundreds or thousands of companies. These are often used to gauge the performance of the overall market, as with an index such as the Standard & Poor's 500, which is made up of 500 of America's leading companies. The Wilshire 5000 is an even broader market index, containing some 7,000-plus companies, almost every public company. Other indexes are smaller, or more focused, perhaps containing just small companies or pharmaceutical companies or Latin American companies.
Indexes aren't things you invest in, though. To meet the needs of people interested in index-based investments, index mutual funds were created. If you want to invest in a certain index, for example, you would invest in an index fund based on it. Another option, introduced more recently, is the exchange-traded fund, which offers investments based on indexes that trade like stocks.
We at the Fool have long recommended that most investors invest in index funds, as they offer a simple, easy way to roughly match the overall market's performance. BerkshireHathaway's (NYSE:BRK.A) superinvestor Warren Buffett has recommended them.
Learn more in our 60-Second Guide to Index Investing. Give exchange-traded funds some consideration, too. And if you'd like to read about exceptional non-index funds, check out our latest newsletter, Motley Fool Champion Funds.
Longtime Fool contributor Selena Maranjian owns shares of Berkshire Hathaway.
