“Long-term data repeatedly document that investors would benefit by switching from active performance investing to low-cost indexing.” – Charles Ellis

Don’t try to pick stocks. Buy the entire market with an index fund!

An index is a portfolio of stocks that make up the entire market. If a company has a larger market cap, it makes up a bigger portion of the index. For example the S&P 500 index includes 500 of the largest stocks in the US. Amazon is about 3% of the market and hence it makes up 3% of the index. Similarly Tesla is 2%, Coca-cola is 1% etc An index fund buys all the companies in the index at the same relative ratio. So if you invest $100 in the index fund, that buys you $3 worth of Amazon, $2 worth of Tesla, $1 worth of Coca-cola etc. So with just one purchase, you now own a piece of each company that makes up the market.

There are many different indexes which track the performance of different markets:

Stock IndexWhat it tracks
S&P 500.500 leading publicly traded companies in the U.S.
Dow Jones Industrial Average30 of the largest and most influential (“blue chip”) companies in the United State
Nasdaq CompositeAll the stocks traded on the Nasdaq stock exchange
Total Stock Market IndexAll public traded companies in the US
MSCI World Index/ FTSE World IndexAll stocks from all over the world (excluding 10 or 15% which comprise of the small cap stocks)

There are also sector specific index funds tracking Technology, Financials etc.

For our needs, however I don’t think we need to go down the rat hole with sector specific funds. In fact if you are just starting out, just pick a mutual fund tracking the broad market to put 100% of your stock investments (Eg: VTSAX at Vanguard or FZROX at Fidelity). No need to pay high fees to active stock picking mutual funds or advisors, who don’t do better than the market (the index they are comparing against) anyway.