Investing in shares within an index
Investing in index funds has a number of advantages and of course there are risks associated with this way of investing. That is why it is important that you know what you are getting into and that you should know as many terms as possible regarding this subject.
What exactly is a stock market index?
A stock market index can be seen as a container containing all kinds of shares and bonds. This container serves as a kind of barometer of the developments on the stock exchange or the financial market. There are many types of indices. You can think of bonds, real estate, shares, hedge funds and commodities. The indices are available on the market in different currencies and are composed in different ways.
Diversification within indexes
Within indexes, there is always diversification. Your investment will never be about one company. The diversification within an index can be by region, by industry or by the size of companies. In addition, the diversification can also be related to country. For example, if you were to look at the largest stock market in the Netherlands, the AEX, this index contains around 35 shares that are selected based on trading volume. If you decide to invest in the AEX, you will therefore have little diversification of your money. If something goes wrong with the AEX, you will also see this reflected just as sharply in your portfolio. By investing in an index fund with more shares in ‘the bin’, the diversification of your money is also better distributed and the blows of a negative result on the stock market will be less severe.
Dividend: yes or no?
Within the indexes, you have to deal with different types. In addition to the fact that there are different currencies, you also have to deal with a difference in dividend. For example, there are indexes that do not pay out dividends. These are called the price variant. On the other hand, there are the reinvestment variants, the indexes on which dividends are paid out. The return on the reinvestment index is often somewhat higher than the return on a price index.
Compare brokers and start index investing
Are you excited about index investing after reading this article? Check out which brokers you can invest in indices with and find the broker that suits you best!