How can you invest in a stock market index and isn't that riskier then investing in a single company?
http://en.wikipedia.org/wiki/Index_fundFirst, an index isn't a single company. It's a broad spectrum of companies across an entire market or industry. For example, any one cell phone company might do well or poorly, but what are the odds of every cell phone company in the world all doing poorly? If you were to buy into a "cell phone company index" that bought stocks of all cell phone companies...it wouldn't matter if any one particular company went bankrupt or were bought out because presumably some other company would pick up what was lost.
Second, in theory it removes people from the decision making process. An index isn't a collection of stocks that some particular person or group of people think is going to do well for whatever arbitrary reason. It's an attempt to mimic the action of whatever market or industry they're mimicking. If you buy into something like the
Wilshire 5000, which attempts to mimick the action of "publicly traded companies in the US" and has 4100 different stocks in it, so long as "the US market" is doing well it doesn't matter what any particular company or industry does. You're not depending on a single guy in a suit measuring price/earning ratios and managing your fund based on his personal beliefs. Instead you're betting that "the market, overall" will do well.
if a investment company makes 5% on my money and then takes
2-3% of that I barely will make inflation.
Commission structures vary, but it's possible to pay a lot less than 2-3%. If you're using mainiac's strategy and planning to do a long term hold, you can probably get away paying 5% on intial buy-in and less than one percent per year. For example,
here's a mutual fund with a .2% expense ratio.
Here's an EFT with .1%. .5% to 1% is more common, but it's possible to pay much less. Note however, that this is percentage of total fund, not percentage of profit. Even if a fund loses money, you'll still pay that percent.
Anyway, it's a valid strategy. It's not what I would personally recommend, but if you're extremely adverse to risk, unwilling to take the time to learn more about finance, and your goal is to start investing at age 18 and have enough money to retire comfortably at age 60, it might be an effective way to accomplish that.
What about seeing what they are investing in themselves and buying the larger companies that they are hedging their bets in?
It's generally impractical for most investers to do that becuase they don't have enough money. I mentioned the Wilshire 5000, but let's use the S&P 500 as an example. It only has 500 stocks in it.
Here's the list.
So what are you going to do, buy one share of each of those 500 stocks? At $10/trade that would be $5000 in broker's fees. Plus, not all stocks are priced the same. For example,
google is trading at $756/share, wheres
AGL Resource is selling for $40/share. So...do you buy one share of each, in which case you're paying a $10 fee to buy AGL that's only worth $40 which therefore has to go up by 25% just to break even? Or do you buy an similar percentages of each stock? 500 different stocks, so have half a percent of your total investment in each. For example, 1 share of google is about $760, so buy $760 worth of each stock. 1 share of google @ $760, and 19 shares of AGL @ $40, etc. If you take this route, then even assuming google is the most highly values stock in the index (which I doubt) buying $760 worth of 500 different stocks would be $378,000, plus the $5000 in broker's fees.
Or you could buy
1 share of the index for $1447.
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Topic: Freedom 25 (Read 5046 times)