Stock Market Investing Tips for the Novice

Investing in stocks doesn't have to just for the market savvy. Anyone with a self directed IRA, or even just funds to open an investment account can invest in the stock market. Don't know anything about stocks you say? Well, there is a solution for those that either don't have the time or inclination to do lots of study. Index funds or ETFs are the vehicles of choice for these types of investors.

What is an index fund? An index fund is sort of like a mutual fund. A mutual fund is made up of a group of stocks that are selected for certain reasons. This reason could be stock value, past performance, by sector, or even by the philosophies of the companies , such as a green fund - based on a company's environmental impact. These mutual funds have a fund manager who takes a percentage of the funds earnings, as well as earning commissions based on trades within the fund. If the manager doesn't do a good job, they still get paid the commissions, while you lose the value.

An index fund, on the other hand, is a group of stocks that make up an entire index, such as the S&P 500 index. This particular index fund includes all of the stocks in the S&P 500, regardless of any particular stocks performance. These indices are normally compiled by computer, so this eliminates the need for a fund manager, therefore reducing expenses. The idea behind the index is that it will give you stable growth. The stock market over time has risen - generally 5-7% per year, with some flux. A mutual fund manager is always trying to pick stocks that beat the market average, and taking on inherent risk in doing so. Buying an index fund basically will give you average market returns each year - with no chance of beating the market average, but not under performing, either. So, purchasing shares in an index fund will involve only the investor deciding which index to purchase. You can open an investment account with a company such as Vanguard and purchase their index fund. Most index funds require a certain amount to open, and a specific amount reinvested each month.

If you don't have as much money and still want to take advantage of index fund investing, consider ETFs. ETFs (or Exchange Traded Funds) are just like the index funds, only they are traded by shares like any other single company, and are traded on the exchanges such as the NYSE. The ETFs mimic an index, so if you want the S&P 500, you can purchase an ETF under the symbol SPY (for example). If you want to purchase the entire NASDAQ, look for the symbol QQQQ.

You can purchase 50 shares of an ETF (for example) and never buy any more if you don't want to. You may purchase ETFs through any brokerage account, unlike the index funds, which are purchased through the fund company. They are also very liquid - if you decide that you don't like the performance of a specific sector, or want to cash out - you just sell your shares and the transaction is done. Another advantage of the ETFs is that you can keep all of your holdings under one brokerage account, which makes for easier tracking for the less experienced investor.

Whichever you choose, investing in these vehicles can be done by novice investors without the fear of knowing whether or not the stock you buy will perform well or not. Index investing is done for long term investing.