You buy index funds through a brokerage account by opening one, funding it, and placing an order for the fund or ETF you want

The actual purchase takes minutes once your account is set up and money is in it. You log into your brokerage, search for the fund by its ticker symbol (like VOO for Vanguard's S&P 500 fund), decide how many shares you want, and click buy. The hard part is choosing which brokerage to use and which index fund to buy — not the mechanics of the transaction itself.

Most brokerages charge no commission to buy index funds anymore, though some funds carry internal fees that reduce your returns over time. You will pay those fees whether you buy through a discount broker like Fidelity or a full-service advisor, so the real choice is whether you want to research funds yourself or pay someone to do it.

Key Takeaways

  • You need a brokerage account (through Fidelity, Vanguard, Charles Schwab, or similar) before you can buy any index fund.
  • Most brokerages let you open an account online in 10 to 15 minutes and fund it by linking a bank account or transferring money.
  • Index funds come as mutual funds (you buy shares at the end of each trading day) or ETFs (you buy shares during the trading day like a stock).
  • Every index fund charges an annual fee called an expense ratio; lower is better, and differences of 0.1% compound into thousands of dollars over decades.
  • You can buy index funds inside a regular taxable account or inside a tax-advantaged account like a 401(k) or IRA, and the rules differ for each.

Opening a brokerage account

You choose a brokerage, go to their website, and fill out an online form with your name, address, Social Security number, and employment information. The process takes 10 to 15 minutes. The brokerage will ask whether you want a taxable account (money you can withdraw anytime without penalty) or a retirement account (money locked until age 59½, but with tax breaks). Most people starting out open a taxable account first.

Major brokerages that let you buy index funds include Fidelity, Vanguard, Charles Schwab, E-Trade, and Merrill Edge. They all charge zero commission to buy index funds. The differences are in the user interface, customer service quality, and which index funds they offer cheaply. Vanguard and Fidelity both offer their own low-cost index funds; if you open an account at Vanguard, you pay lower fees on Vanguard funds, and the same is true at Fidelity.

After you open the account, you need to fund it. You can link a bank account and transfer money electronically (usually takes one to three business days), or you can mail a check. Some brokerages let you start trading immediately with unsettled cash; others make you wait for the transfer to clear.

Understanding mutual funds versus ETFs

An index mutual fund is a pool of money that tracks an index. You buy shares at a fixed price set once per day after the market closes. If you place an order at 2 p.m., you get that day's closing price, not the price at 2 p.m. You can set up automatic monthly purchases, and many people do.

An index ETF (exchange-traded fund) is also a pool of money that tracks an index, but you buy and sell shares during the trading day like a stock. The price changes every second. ETFs are slightly more tax-efficient in taxable accounts because of how they're structured, but the difference is small for most people. Both charge annual fees.

For a beginner, the choice between them matters less than the choice of which index to track. A Vanguard S&P 500 mutual fund and a Vanguard S&P 500 ETF track the same 500 companies and charge nearly the same fee (around 0.03% per year). Pick whichever one your brokerage makes easiest to buy.

Comparing index funds by expense ratio

Every index fund charges an annual fee called an expense ratio, shown as a percentage. Vanguard's S&P 500 fund charges 0.03% per year. Fidelity's charges 0.015%. A fund that charges 0.5% is expensive by modern standards. The difference sounds small, but on $10,000 invested over 30 years at 7% annual returns, a 0.03% fee versus a 0.5% fee costs you roughly $3,000 in lost growth.

When you search for a fund on your brokerage's website, the expense ratio appears in the fund details. Look for it before you buy. If your brokerage offers multiple versions of the same index (say, three different S&P 500 funds), pick the one with the lowest expense ratio. You are not paying extra for this — it is the fund's internal cost, and lower is always better.

Some funds also charge a sales load, which is a commission paid to a broker or advisor. Index funds sold through discount brokerages almost never have loads. Avoid them if they do.

Placing your first order

Once your account is funded, log in and search for the fund by its ticker symbol. For example, VOO is Vanguard's S&P 500 ETF, and VTSAX is Vanguard's total stock market mutual fund. The brokerage will show you the fund's price, expense ratio, and performance history. Click the buy button.

You will be asked how many shares you want to buy or how much money you want to invest. If you say "invest $1,000," the brokerage calculates how many shares that buys at the current price. If you say "buy 10 shares," it calculates the cost. Either way works. For a mutual fund, your order settles at that day's closing price. For an ETF, it settles at the price when your order executes during the trading day.

After you click confirm, the order is placed. You will see it in your account history. The shares appear in your account within one to three business days, depending on the brokerage's settlement time. You now own a piece of an index fund.

Buying inside a retirement account

If you have a 401(k) through your employer, you may be able to buy index funds inside it. Your employer's plan offers a menu of funds to choose from — you do not get to pick any fund you want. Most 401(k) plans include at least one low-cost index fund option. Ask your plan administrator or check your plan documents.

If you have an IRA (Individual Retirement Account), you open it at a brokerage just like a taxable account, but you tell the brokerage it is an IRA when you set it up. You can then buy any index fund that brokerage offers. IRAs have contribution limits (for 2024, $7,000 per year if you are under 50), but no limit on how much the money can grow inside the account.

Money inside a 401(k) or IRA grows without being taxed each year. You pay taxes only when you withdraw it in retirement. This is why retirement accounts are powerful — the tax savings compound over decades. For this reason, most financial advisors suggest funding a 401(k) or IRA before buying index funds in a taxable account.

Setting up automatic purchases

Many brokerages let you set up automatic monthly or weekly purchases of an index fund. You choose the fund, the amount, and the date each month, and the brokerage buys it for you. This is called dollar-cost averaging, and it removes the need to time the market or remember to buy.

Automatic purchases are especially useful if you are investing money from your paycheck. You can set it up once and forget it. The purchases happen whether the market is up or down, which actually works in your favor over time — you buy more shares when prices are low and fewer when prices are high.

Not all brokerages offer automatic purchases for all funds, so check your brokerage's website. If they do, it usually takes two minutes to set up in your account settings.

What happens after you buy

Once you own index fund shares, you do not have to do anything. The fund manager automatically rebalances the holdings to match the index. If you own an S&P 500 fund, the manager buys and sells stocks inside the fund to keep it tracking the index, and you pay the expense ratio for that work.

You will receive a statement each quarter or month showing your holdings and their value. If the market goes up, your shares are worth more. If the market goes down, they are worth less. This is normal. Index funds are meant to be held for years or decades, not traded in and out.

If your fund pays dividends (most do), the brokerage will reinvest them automatically by default, buying more shares of the same fund. You can change this setting if you want, but reinvestment is usually the right choice for long-term investors.

Frequently Asked Questions

Do I need a lot of money to start buying index funds?

No. Most brokerages let you open an account with $0 and buy your first index fund with as little as $1. Some index funds have minimum initial purchases of $1,000 or $3,000, but many brokerages waive these minimums if you set up automatic monthly purchases. Check your brokerage's rules before you open an account.

Can I lose money buying index funds?

Yes. If the market falls, the value of your index fund falls too. But index funds track the overall market, so you are betting on the market's long-term growth, not on a single company. Historically, the market has recovered from every crash and reached new highs. If you need the money within five years, index funds may not be right for you.

What is the difference between a fund's ticker and its name?

The ticker is a short code (like VOO or VTSAX) that you use to search for and buy the fund. The name is the full name (like "Vanguard S&P 500 ETF"). Always search by ticker to make sure you are buying the right fund, because similar names can refer to different funds with different fees.

Do I have to buy whole shares, or can I buy partial shares?

Most brokerages now let you buy fractional shares, meaning you can invest any dollar amount and own a piece of a share. This makes it easier to invest small amounts or set up automatic purchases. Check whether your brokerage offers fractional shares before you open an account.

Should I buy an index fund or individual stocks?

Index funds are simpler and lower-risk than picking individual stocks. You own hundreds or thousands of companies in one fund, so one company's failure does not hurt you much. Individual stocks require research and carry more risk. Most people do better with index funds, especially if they are new to investing.