Index funds vs individual stocks? Whats the difference??
For those of you that have kindly requested more information ℹ️ on my recent instagram story explaining the difference between index funds and individual stocks- here it is!
Let’s start from the beginning and use my flower market example! -
- You walk into a large flower market in Sydney (ASX) Australian Stock Exchange it’s a huge warehouse filled with colourful blooms.
There are the top 300 varieties of flowers on sale 🌸🌷💐 all with different stands in different locations with different florists standing at their counters.
Now all flowers are grouped into sectors- even though they may have different colours or special variety’s they are still the botanical classification for the type of flower 🌷
For example all the hydrangeas are in a sector for hydrangeas not matter the size or colour ( that’s like the financial sector)
All the roses are together ( that’s like the consumer discretionary sector)
All the Lilly’s are together that’s the industrial sector.
There are 11 sectors all common around the world and 5 sectors for special Australian stocks ( like our special native botanicals that grow here)
As you know florists sell bunches of flowers 💐 it’s not realistic to go to a huge market and buy one stem - you have to buy a bunch.
This is how the stock market works in Australia you must place a minimum order of $500 dollars plus brokerage fee 9.95-29.00 onwards - (think of brokerage like the $10 dollar entry fee to Sydney flower markets!)
So keep this in mind while I explain the difference between INDIVIDUAL stocks and INDEX FUNDS
An individual stock is one small portion of one company - for example a portion of Commonwealth 🏦 bank, Telstra or ANZ
So you would walk over to the stand and with your budget but as many stems of one flower as you could afford. You bouquet will be only hydrangeas or only roses - one style of flowers and you have paid per stem (per stock)
Index funds - these are premade bouquets 💐 mixed with one of each flower in the top 300 that are in the flower market (ASX) shed. They are spread over all the major sectors and make a diverse bouquet sampling all the flowers you see! You pay a small fee usually 0.02 0r 0.03 (estimate) depending on the company you purchase it from. Index funds are a favourite of Financial Independence investors and are widely considered safe and tend to outperform managed funds over the long run as they represent a market average.