Index investing
Investing is becoming increasingly popular. Whether you invest in that small listed company or that one large company on the AEX, it always remains a risk. You can limit the risk by reading up on the different investment forms and the risks that are associated with them. Do you not like risks? Then index investing might be an interesting investment form.
What is index investing?
With index investing, you invest in an entire stock market index and not in separate shares, saving time! In addition, the risk is spread more, because you invest in all shares at the same time. With index investing, you can, for example, invest in the AEX index or the Dow Jones index. Index investing does not necessarily have to be in shares. Index investing is also possible if you want to invest in bonds, real estate or commodities.
How does this work?
Imagine you want to start with index investing, and therefore invest in an entire index, then you can buy all the shares from the index you have chosen at once. You can do this in different ways, based on derivatives or based on ETFs. This blog goes further into trading via ETFs (trackers)
The different types!
You have 2 types of index trackers:
- The physical replication of an index: Here you invest in the real values of shares or bonds, of a certain index. Because you invest in the real values, you run relatively little risk. Of course there is always a certain degree of risk that you run, it remains investing!
- The synthetic replication of an index: Here you do not invest in the real, actual values but in a ‘swap’, or an exchange amount. Here you enter into an exchange agreement, a ‘swap agreement’, with your counterparty. Because you do not invest in the real value, you run more risk.
Is index investing something for you?
Whether index investing is something for you depends on what you want! For example, do you want to spend a lot of time on it and be actively involved? Or would you rather invest in something all at once and not have to look at it so often? With index investing, you have the advantage that it is relatively simple. This is because you simply invest in an entire index all at once and therefore do not have to keep an eye on different companies all the time! So if you do not like having to be very actively involved in investing, then index investing might be something for you. In addition, you have lower transaction costs because you do not buy all the shares separately from different companies. With index investing, you only have one transaction for which you have to pay (transaction) costs.
The risk of index investing is relatively lower. This is because index funds spread the risk for you. One profitable company can mutually compensate the loss of another company, because you have invested in one entire index. Of course, spreading the risk also occurs when you invest in multiple categories, for example when you invest in shares and bonds . Unfortunately, no one can predict the future: you always have risk! However, it may be that you prefer not to invest in an entire index. For example, many people claim that you cannot achieve a higher return than the index itself with index investing. In practice, it turns out that it is difficult to achieve a higher return than the index itself.
Start index investing
Did this article make you enthusiastic about index investing? Then read more information in our knowledge base about index investing or compare brokers !