What are Index Funds? A Super Simple Explanation for Kids, Teens and Beginners

What are Index Funds? Funds 101: Easy Peasy Finance for Kids and Beginners

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Introduction to Index Funds for Kids and Teens

This video explains the concept of an index fund in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about index funds, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.

Suitable for students from grade levels:

• Kindergarten
• Elementary School
• Middle School
• High School

The topics covered are:

• What are index funds
• Impact of a change in the constituents of the index
• Advantages of index funds
• Typical investment returns
• Are index funds the right investment for you

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Howdy Wall St. Willy!

Sometime ago we talked about mutual funds and I heard something about an index fund. So…

What is an index fund anyway?

An index fund is a fund whose portfolio is built to match the constituents of a stock market index.

What do you mean?

Each index fund is based on a particular stock market index like the S&P 500. It buys all the stocks that make up the index and in the same proportion.

What happens if there is a change in the constituents of the index?

The index fund tracks the index very closely. So, they would change their portfolio to reflect any change in the index.

For example, if company A is replaced with company B in the index, the index fund would sell all the stocks of company A that it owned and buy stocks of company B in proportion to what the actual index bought or sold.

Well, what are some advantages of index funds, if there are any?

There are many advantages of index funds. Here are a few of them.

The first one is that the index funds provide a broad market exposure because they invest in all the stocks that make up an index. So, they are usually well diversified.

They also have a low portfolio turnover, which means they don’t buy and sell stocks very frequently.

They also have low expense ratios or low overall cost because they don’t have to pay too much money as brokerage thanks to low portfolio turnover and they don’t have to hire research analysts that will do the research to decide which stocks to buy or sell.

Well, what kind of return can you expect from an index fund?

Generally speaking, index funds closely track the index.

So, the returns from investing in an index fund will be almost equivalent to the return from the index it tracks.

Who should invest in index funds?

Index funds are less volatile in nature compared to individual stocks and give good return over the long term.

So, these should be a core holding of everyone’s portfolios, especially in retirement accounts like an IRA and 401K.

Thank you very much for telling me about an index fund, Wall St. Willy.

You are welcome, Sooper Cooper. Remember, Finance is Your Friend!

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Download Transcript: Ideal for Use by Teachers in their Lesson Plan to Teach Kids & Teens

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Podcast: What are Index Funds