The Basic Steps to Buy Index Funds

To invest in index funds, you need a brokerage account, money to deposit, and a choice of which index fund to buy. You open the account online or at a bank, transfer money in, search for the index fund by its ticker symbol, and place a buy order. The whole process takes about 15 minutes once your account is funded. The fund then holds shares in all the companies in that index, so you own a piece of hundreds or thousands of companies at once.

Most people use one of three routes: a brokerage firm (like Fidelity, Schwab, or Vanguard), a bank's investment division, or a robo-advisor that automates the buying for you. Each route works the same way at the end — you own shares of an index fund — but they differ in fees, minimum deposits, and how much hand-holding you get.

Key Takeaways

  • You need a brokerage account with money in it before you can buy any index fund; opening one takes 10 to 20 minutes online.
  • Index funds charge annual fees (called expense ratios) that range from 0.03% to 0.20% per year for most low-cost options, so a $10,000 investment costs $3 to $20 annually.
  • You can buy index funds through a regular brokerage, a bank, or a robo-advisor; the choice depends on whether you want to pick funds yourself or have a computer do it.
  • Index funds are bought and sold during market hours (9:30 a.m. to 4 p.m. Eastern time on weekdays), and your order settles in two business days.

Opening a Brokerage Account

A brokerage account is simply a container where you hold investments. You open one by going to a brokerage's website, entering your name, address, Social Security number, and employment information, and answering questions about your investment experience. The firm runs a background check and verifies your identity — this takes a few minutes to a few hours. Once approved, you can link a bank account and transfer money in.

Most brokerages have no minimum deposit to open an account, though some older firms still require $500 or $1,000. Fidelity, Schwab, and Vanguard all allow you to start with any amount. Once money lands in your account (usually one to three business days after you transfer it), you can buy index funds immediately.

You will need to choose between a regular taxable brokerage account and a retirement account like an IRA or 401(k). A taxable account has no contribution limits and no restrictions on when you withdraw money, but you pay taxes on gains and dividends each year. A retirement account has annual contribution limits (for 2024, $7,000 for an IRA and $23,500 for a 401(k) if your employer offers one) but you pay no taxes on gains until you withdraw money in retirement. Most people start with a taxable account if they are saving outside retirement, or use their employer's 401(k) if one is offered.

Finding and Buying a Specific Index Fund

Once your account is open and funded, you search for an index fund by its ticker symbol. The S&P 500 index has dozens of funds that track it; the most common are VOO (Vanguard), IVV (BlackRock), and SPLG (SPDR). A total U.S. stock market index has VTI (Vanguard), ITOT (iShares), and SWTSX (Schwab). An international stock index has VXUS (Vanguard), IXUS (iShares), or SWISX (Schwab). You type the ticker into your brokerage's search box, click the fund, and see its expense ratio, holdings, and performance history.

To buy, you enter the number of shares you want or the dollar amount you want to invest, choose whether to place a market order (buy at today's price) or a limit order (buy only if the price drops to a certain level), and confirm. A market order executes during market hours — if you place it at 2 p.m. on a Tuesday, it fills at that day's closing price. If you place it after 4 p.m. or on a weekend, it waits until the market opens the next business day. The transaction settles two business days later, meaning the shares officially belong to you and the money officially leaves your account.

Understanding Fees and Expense Ratios

Every index fund charges an annual fee called an expense ratio, expressed as a percentage of what you have invested. A fund with a 0.05% expense ratio costs $5 per year on a $10,000 investment. A fund with a 0.20% expense ratio costs $20 on the same amount. The difference sounds small, but over 30 years it compounds — a 0.05% fund versus a 0.20% fund on $10,000 growing at 7% annually leaves you with roughly $800 more in the low-cost fund by retirement.

Most index funds from major brokerages charge between 0.03% and 0.20% per year. Vanguard, Fidelity, and Schwab all offer index funds under 0.10%. Some older or less popular index funds charge 0.50% or more, so check the expense ratio before you buy. The brokerage will display it on the fund's information page, usually labeled "expense ratio" or "ER".

Brokerages themselves do not charge a commission to buy or sell index funds — that changed in 2019 when most firms dropped trading fees. Some robo-advisors charge an annual management fee (usually 0.25% to 0.50%) on top of the fund's expense ratio, so you pay both. A regular brokerage account has no management fee, only the fund's expense ratio.

Choosing Between Brokerages and Robo-Advisors

A traditional brokerage like Fidelity, Schwab, or Vanguard lets you pick which index funds to buy and when. You decide how much to put in U.S. stocks, international stocks, and bonds. You decide which specific funds to use. You can buy and sell whenever you want. This route requires you to do some research and make decisions, but it costs less in fees and gives you full control.

A robo-advisor like Betterment, Wealthfront, or Vanguard Personal Advisor Services asks you questions about your age and risk tolerance, then automatically builds a portfolio of index funds for you and rebalances it over time. You do not pick individual funds — the computer does. This route costs more (usually 0.25% to 0.50% per year in management fees) but requires almost no knowledge or ongoing work. It is useful if you do not want to think about investing or if you are worried about making the wrong choice.

A third option is a target-date fund, which is itself an index fund that holds a mix of stock and bond index funds. You pick the year you plan to retire, and the fund automatically shifts from aggressive to conservative as that year approaches. Vanguard, Fidelity, and Schwab all offer target-date index funds with expense ratios under 0.10%. This is the simplest route if you want to set it and forget it.

What Happens After You Buy

Once you own index fund shares, you do not have to do anything. The fund automatically holds all the companies in its index, and when the index changes (a company is added or removed), the fund adjusts automatically. You receive dividends — payments from the companies in the fund — usually once or four times per year. Your brokerage can reinvest those dividends automatically, buying more shares of the fund, or you can take them as cash.

Your account shows your current balance, your total gain or loss, and your gain or loss as a percentage. You can buy more shares anytime by transferring money in and placing another order. You can sell shares anytime during market hours, and the money lands in your account two business days later. There is no penalty for selling, though if you sell at a loss you can use that loss to offset other gains for tax purposes (in a taxable account; retirement accounts have different rules).

If you set up automatic transfers — many brokerages allow you to move money from your bank account to your investment account on a schedule — you can buy index funds every month or every paycheck without thinking about it. This is called dollar-cost averaging and is a common way to build wealth over time.

Frequently Asked Questions

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

No. Most brokerages have no minimum deposit, so you can open an account and buy a single share of an index fund for $100 or $200. Some index funds cost $50 to $100 per share, others cost $300 or more, so the dollar amount you need depends on the fund's share price. You can also buy fractional shares — most brokerages now let you invest any dollar amount, even $1, and you own a piece of a share.

What is the difference between an index fund and an ETF?

An ETF (exchange-traded fund) is a type of index fund that trades like a stock during market hours, so its price changes throughout the day. A traditional index fund (called a mutual fund) is priced once per day at the market close. Both track an index, both have low fees, and both work the same way for most investors. ETFs are slightly more tax-efficient in taxable accounts and trade throughout the day, while mutual funds are simpler for automatic investing. Most new investors use ETFs because they are cheaper and more flexible.

Can I lose money in an index fund?

Yes. If the index goes down, your investment goes down. The S&P 500 has dropped 20% or more several times in the past 30 years. However, it has always recovered and reached new highs. Over long periods (10 years or more), stock index funds have historically gained money. If you need the money within five years, consider holding some in bonds or cash instead.

Should I invest in one index fund or several?

One broad index fund like a total U.S. stock market fund or an S&P 500 fund is enough to start. Many investors add an international stock index fund to diversify outside the U.S., and some add a bond index fund for stability. A simple portfolio might be 70% U.S. stock index, 20% international stock index, and 10% bond index. You do not need dozens of funds — more funds do not mean better returns, and they make rebalancing harder.

When should I buy index funds — now or should I wait for the price to drop?

Trying to time the market (waiting for prices to drop before buying) usually backfires because nobody knows when prices will drop or rise. Most financial advisors recommend buying as soon as you have money to invest, even if the market is high. If you have a lump sum, you can invest it all at once or spread it over three to six months to reduce the risk of buying right before a drop. Over time, the timing matters less than the total amount you invest and how long you stay invested.