The basic steps to buy index funds

To invest in index funds, you open a brokerage account, deposit money, search for the index fund you want, and place a buy order. That's the core process. The account takes a few days to set up, the deposit takes one to three business days to clear, and the actual purchase happens in minutes once your cash is available.

You don't need a large sum to start. Most brokerages let you open an account with no minimum balance, and you can buy a single share of an index fund for whatever that fund costs per share — which might be $50, $200, or $400 depending on the fund. Some brokerages also offer fractional shares, meaning you can invest $50 even if one share costs $200.

The brokerage holds your account and your fund shares. You log in to see your balance, add more money, or sell shares whenever you want. You don't receive physical certificates or have to do anything special — it all happens online.

Key Takeaways

  • Open a brokerage account with a firm like Fidelity, Vanguard, Charles Schwab, or a robo-advisor, which takes 10 to 20 minutes and requires basic personal information and a Social Security number.
  • Link a bank account and transfer money into your brokerage account, which typically clears within one to three business days.
  • Search for the specific index fund by its ticker symbol (such as VOO for the S&P 500) and place a buy order for the number of shares you want.
  • Index funds charge an annual fee called an expense ratio, which ranges from 0.03% to 0.20% for most low-cost index funds, and this fee is deducted automatically from your account.
  • You can set up automatic monthly deposits so money transfers from your bank to your brokerage account on a schedule you choose.

Choosing a brokerage to hold your account

A brokerage is a company that holds your money and lets you buy and sell investments. The major ones are Fidelity, Vanguard, Charles Schwab, E*TRADE, and TD Ameritrade. Each one has a website and a mobile app where you manage your account.

These brokerages don't charge you to open an account or to buy index funds. They make money from other services or from the interest they earn on your cash balance. The main difference between them is the user interface, the research tools they offer, and whether they have physical branch locations if you want to speak to someone in person.

If you want someone else to manage your money automatically, you can use a robo-advisor like Betterment, Wealthfront, or Vanguard Personal Advisor Services. These services ask you questions about your age and risk tolerance, then automatically build and rebalance a portfolio of index funds for you. Robo-advisors charge a yearly fee (typically 0.25% to 0.50% of your account balance) on top of the expense ratios of the funds themselves.

For most people starting out, a regular brokerage account at Fidelity, Vanguard, or Schwab is simpler and cheaper than a robo-advisor. You do the choosing yourself, but you avoid the extra fee.

Opening your account and funding it

Go to the brokerage's website and click the button to open a new account. You'll enter your name, address, date of birth, Social Security number, and employment information. The process takes 10 to 20 minutes. The brokerage will ask what type of account you want — for most people, a regular taxable brokerage account is the right choice. (If you have a workplace retirement plan or want to save for retirement with tax advantages, that's a different account type, but those are separate from regular index fund investing.)

Once your account is open, you link a bank account. You'll provide your bank's routing number and your account number, which you can find on a check or in your bank's app. The brokerage will make two small test deposits to your bank account (usually a few cents each) to verify you own the account. You confirm those amounts in the brokerage app, and then the link is complete.

Now you can transfer money from your bank to your brokerage account. The transfer usually clears within one to three business days. Some brokerages let you set up automatic recurring transfers — for example, $500 on the first of every month — so you don't have to remember to do it manually each time.

Finding and buying the specific index fund

Once your cash is in your brokerage account, you search for the index fund you want by its ticker symbol. The ticker is a short code: VOO is the Vanguard S&P 500 ETF, SPY is the SPDR S&P 500 ETF, and VTI is the Vanguard Total Stock Market ETF. If you don't know the ticker, you can search by the fund's full name.

The brokerage will show you the fund's current price per share, its expense ratio, and other details. You decide how many shares you want to buy. If the fund costs $400 per share and you have $2,000 to invest, you can buy 5 shares. If the brokerage offers fractional shares, you could instead invest exactly $2,000 and own 5 full shares plus a partial share.

You place a buy order. A market order buys at the current market price and executes when ready (usually within seconds). A limit order lets you set a maximum price you're willing to pay, and it only executes if the fund drops to that price or lower. For index funds, a market order is usually fine because the price doesn't swing wildly.

Once the order executes, you own the shares. They appear in your account balance right away. You don't receive a certificate or have to do anything else — the brokerage holds them for you.

Understanding the costs you'll pay

Index funds charge an annual fee called the expense ratio, expressed as a percentage of your account balance. A fund with a 0.05% expense ratio costs you $5 per year for every $10,000 you have invested. This fee is deducted automatically from your account — you don't write a check or do anything manually.

Most low-cost index funds have expense ratios between 0.03% and 0.20%. Vanguard and Fidelity both offer index funds with expense ratios below 0.10%. The difference between a 0.05% fund and a 0.20% fund adds up over decades, so it's worth choosing a fund with a lower expense ratio when you have the choice.

You won't pay a commission to buy or sell index funds at most brokerages. Some older brokerages used to charge $5 to $10 per trade, but that's rare now. Check the brokerage's fee schedule to confirm, but the major ones don't charge per-trade commissions.

Setting up automatic investing

Once you've bought your first index fund, you can set up automatic monthly deposits so money moves from your bank account to your brokerage account on a schedule. Most brokerages let you choose the amount and the date — for example, $500 on the 15th of every month.

You can also set up automatic purchases: the brokerage will buy the same index fund for you each month using the money that arrives. This is called dollar-cost averaging, and it removes the guesswork of deciding when to buy. You invest the same amount on the same schedule regardless of whether the fund's price is high or low.

Automatic investing is optional, but it's a straightforward way to build your position over time without thinking about it. You can change or stop the automatic transfers anytime.

What happens to your money after you buy

Index funds pay dividends — small cash distributions from the companies in the fund. When your fund pays a dividend, the brokerage deposits the cash into your account. You can then reinvest that cash by buying more shares, or you can leave it sitting in your account as cash.

Most brokerages offer dividend reinvestment, which automatically uses your dividends to buy more shares of the same fund. This happens without any action from you and without any commission. Reinvesting dividends is usually the right choice if you're holding the fund for the long term, because it compounds your returns.

You can sell your shares anytime. You log into your account, select the fund, and place a sell order. The sale executes at the current market price, and the cash lands in your account within one to three business days. You'll owe taxes on any profit (the difference between what you paid and what you sold for), but that's a separate issue from the mechanics of selling.

Frequently Asked Questions

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

No. Most brokerages have no minimum balance to open an account, and you can buy a single share of an index fund for whatever that share costs. Many index funds trade for $50 to $400 per share. If you want to invest less than the price of one share, look for a brokerage that offers fractional shares — Fidelity, Schwab, and Vanguard all do.

What's the difference between an ETF and a mutual fund?

Both are index funds, but they trade differently. An ETF (exchange-traded fund) trades like a stock during market hours, and you can buy or sell it anytime the market is open. A mutual fund is priced once per day after the market closes, and your order executes at that day's closing price. For most investors, the difference doesn't matter much. ETFs are slightly more tax-efficient and have lower expense ratios on average, but mutual funds work fine too.

Can I lose money investing in index funds?

Yes. Index funds track the overall market, so if the market drops, your fund's value drops too. Over long periods (10+ years), the stock market has historically gone up, but there's no may provide. If you need the money in the next few years, index funds might be too risky for you.

How often should I check my account?

There's no right answer. If you're investing automatically and holding for the long term, checking once a month or once a quarter is plenty. Checking daily can tempt you to buy or sell based on short-term price swings, which usually hurts returns. Set it and forget it is a common strategy for index fund investors.

What if I want to move my account to a different brokerage?

You can transfer your shares to another brokerage without selling them. This is called an ACAT transfer (Automated Customer Account Transfer). The new brokerage handles most of the paperwork, and the transfer usually takes five to ten business days. You won't owe taxes on the transfer because you're not selling — you're just moving the shares to a new custodian.