What Is the Stock Market? Here's the One Index Fund I'd Buy to Beat It.
Investors need to think small in order to think big.
I think the stock market is the best way an individual can build wealth. But what is it?
It is simpler than you think. You may start hearing complicated terms that go over your head when tuning in to financial media, but that is just an attempt to make the industry seem more sophisticated than it actually is. Once you understand the basics of the stock market, you can start putting your money to work and build wealth for retirement, all without getting out of bed.
In fact, if you invest $10,000 and earn a standard rate of return, you could end up with hundreds of thousands of dollars 40 years into the future. Here's how, and details about the index fund that could do it over the long haul.
What is the stock market and stock indexes?
The stock market is best understood by comparing stocks to a small business. If you are a small business owner, you may own 100% of your restaurant, accounting practice, or whatever you own. A publicly traded stock allows you to own a percentage of any publicly traded business in the world.
There are 14.6 billion shares of Apple. Someone who buys one share at the current price of approximately $330 will own a tiny percentage of Apple, which corresponds to their share of profits and dividends (hence the term "share price"). The stock market facilitates the buying and selling of stocks, allowing someone to buy a stake in a business at the current market price.
Stock indexes aim to track a group of stocks based on characteristics. For example, the S&P 500 index tracks the 500 largest publicly traded companies in the United States. The Nasdaq-100 tracks the 100 largest non-financial companies listed on the Nasdaq exchange.
How to buy and sell stocks
You can easily buy stocks from your computer or smartphone through digital brokerages. These are companies that facilitate stock trading, using automations to match up buyers and sellers of stocks.
Popular brokerages include Robinhood, Interactive Brokers, and Charles Schwab. To buy stocks via these brokerages, you simply need to download the app on your phone, verify your identity, and deposit funds from your bank account. Once the money is in your account, you can buy whatever stocks (or index funds) you desire.
This will generally outperform holding your money in a savings account. A savings account today may pay you an interest rate of 4%. Compound this out for 40 years, and $10,000 in savings will net you $48,000 by around the time you want to retire or start passing down money to family, charities, or other sources. If you invest in the stock market and earn its average compounded annual return of 10%, you will have $453,000. That's a massive difference.
VTI Total Return Level data by YCharts
Beating the market with this index fund
What if you want to beat the market, though? First, the best way to do so is with a carefully curated collection of individual stocks, such as the proven Motley Fool stock advisor portfolio.
However, there may be an opportunity to beat the market over the long term by just dollar-cost averaging into an index fund every month. The stock market is often measured by the S&P 500 index, which tracks 500 of the largest companies in the United States.
A long-term bet on smaller stocks with much greater upside could help a portfolio beat the S&P 500. One way to do so would be to buy the iShares S&P Small-Cap ETF (IJR -0.11%), which gets you a piece of the 600 small-cap stocks in the United States with minimal fees. Small-cap stocks have trailed the S&P 500 since the COVID-19 pandemic, but have historically outperformed their large-cap peers.
If you have a decades-long time horizon, an index fund of small-cap stocks may be the way to go.
