What is an index fund and how does it work?

An index fund is a type of investment fund designed to replicate the performance of a specific market index, like the S&P 500 or the Dow Jones Industrial Average. Instead of trying to beat the market through active stock picking, it simply holds the same securities in the same proportions as the index it tracks. It works by pooling money from many investors and using it to buy shares of all or most of the companies in the target index. When those companies grow in value, the fund grows too. Because there's no active management involved, index funds typically have very low fees. They offer broad market diversification, making them a popular long-term investment choice for everyday investors.