Instruments

Indices

An index fund is an instrument that gives investors exposure to a basket of underlying assets. So, instead of buying or selling one specific stock, you can invest in an index that is itself exposed to an entire stock market, or a basket of currencies. The best known indices track the value of certain global stock markets. The S&P 500, for instance, is an index that tracks the value of the largest 500 publicly traded companies in the United States.

When compared to individual stocks, investing in an index spreads your risk across all the assets that compose that index. For example, if you invest in one high profile company such as Apple or Facebook, the performance of your investment will be determined by how well or poorly that individual company performs. With an index, you are investing in the market as a whole, so your potential upside may be limited when compared to the individual performers in the index. However, potential downside is also drastically reduced and for this reason, indices are considered less risky investments and are a staple of many portfolios.

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