Own all 500 at once.
The story so far In the last game, owning all ten companies beat picking one in most rounds. But buying 500 companies one at a time would take 500 trades and far more than the $10 you want to start with. Dee's advice, "just put it in the S&P 500," works because of one invention: the index fund. Before you buy anything, you want to know exactly what your $10 would be buying.
An index fund owns every company on a list like the S&P 500. One share of the fund is a tiny slice of all of them.
You get the whole market's return with no stock picking and tiny fees, and no single company can sink you.
You buy shares of the fund in a brokerage app, usually as an ETF with a ticker like VOO or IVV.
A committee at S&P Dow Jones Indices decides which companies are in the S&P 500. Portfolio managers at fund companies like Vanguard and BlackRock keep each fund matching its index.
What you're looking at: a sketch, not exact data. One $10 bill goes into one S&P 500 index fund and gets split across 500 companies, one dot each. The bigger dots in the top row are the biggest companies, which get bigger slices of your money.
One fund, the whole list.
An index fund is three simple ideas stacked together: a list of companies, a pool of money, and a rule for splitting the money across the list.
The list: an index
An index is a list of companies used to measure how part of the stock market is doing. The S&P 500 is a list of about 500 of the biggest U.S. companies, chosen by a committee at S&P Dow Jones Indices. When the news says "the S&P 500 rose 1% today," it means those companies, added up, are worth 1% more than yesterday.
- Index
- The Dow Jones Industrial Average is an index of just 30 big companies. A total stock market index lists nearly every U.S. stock, thousands of them.
- S&P 500
- About 500 companies, like Apple, Walmart and Coca-Cola, that together are worth about 80% of the whole U.S. stock market.
The pool: a fund
A fund pools money from many investors, and a fund company invests it for them. Each investor owns shares of the pool, so everyone owns a slice of everything the fund buys. An index fund is a fund whose rule is simple: buy every company on the index, and don't pick.
- Fund
- 10,000 people each put in $100, so the pool has 10,000 × $100 = $1,000,000. Each person owns $100$1,000,000 = 0.0001, or 0.01%, of the pool.
- Index fund
- The fund spends the $1,000,000 on all 500 companies in the S&P 500. So every person's $100 is spread across all 500.
The rule: bigger companies get bigger slices
The S&P 500 doesn't split your money evenly. It's market-cap weighted: each company gets a slice that matches its market cap, from Lesson 2, compared with all the others. That's why a few giants get a big part of every dollar. Slide to see where your money would go.
- Market-cap weighted
- In early October 2026, Nvidia was about 8.6% of the S&P 500, so $0.86 of every $10 went to Nvidia. The 10 biggest companies together were about 39%.
What you're looking at: real weights, rounded, for the SPY fund that copies the S&P 500, as reported in early October 2026. The bar is your money split by company, from left to right: Nvidia, Apple, Microsoft, the other 7 of the 10 biggest companies, and the other 490 or so companies. The slider sets how much you put in, from $10 to $10,000. Weights change every day as prices move.
Two ways to hold a fund: ETFs and mutual funds
Index funds come in two packages. An ETF, short for exchange-traded fund, trades on a stock exchange all day, just like a stock, so its price moves second by second. A mutual fund is bought from the fund company, and its price is set once a day after the market closes. Some mutual funds ask for a minimum first investment.
- ETF
- SPY, VOO and IVV are three ETFs that copy the S&P 500. Many brokerage apps sell pieces of an ETF share, so $10 is enough to start.
- Mutual fund
- FXAIX (Fidelity) and SWPPX (Schwab) are S&P 500 mutual funds with no minimum. Vanguard's VFIAX asks for $3,000 to start.
The fee: the expense ratio
Every fund charges a yearly fee called the expense ratio, a percent of the money you have in it. You never see a bill. It comes out of the fund automatically, so your return is a little lower. A fraction of a percent sounds tiny, but it's charged every year on your whole balance, and the money it takes stops compounding for you.
- Expense ratio
- VOO charges 0.03%. On $10,000 that's $10,000 × 0.0003 = $3 a year. The average actively managed stock mutual fund charged 0.64% in 2025: $10,000 × 0.0064 = $64 a year.
What you're looking at: a projection, not a promise. Each bar is what monthly deposits would grow to if the fund earned the S&P 500's long-run average of about 10% a year, minus its expense ratio. The top bar charges 0.03% and the bottom bar charges the fee you pick. The dark part of each bar is the money you put in.
Picking vs. copying
Some funds don't copy an index. In an active fund, managers pick stocks and try to beat the index. Copying an index instead is called passive investing. Every year, S&P Dow Jones Indices counts how the pickers did in its SPIVA scorecard, and most of them lose to the plain index, especially over long stretches.
- Active fund
- Over the 20 years through 2024, about 92 of every 100 active funds that invest in big U.S. companies did worse than the S&P 500. Over just 2025, about 79 of 100 did worse.
- Passive investing
- An S&P 500 index fund doesn't try to win. It earns what the 500 earn, minus a fee like 0.03%, and that has beaten most of the pickers.
The list keeps itself fresh
The S&P 500 isn't frozen. When a company shrinks or goes bankrupt, the committee drops it and adds a company that has grown big enough. Tesla, for example, joined in December 2020. So an index fund keeps up with the economy on its own, and it's guaranteed to own the few giant winners from Lesson 2 without anyone having to guess which they'll be.
Two minutes. Just listen.
Tap any line to jump to it.
Shop for a fund.
Four shopping trips in a brokerage app. Each time you get a goal and three funds. Read the fund pages and pick the one that fits the goal best. Your score counts the picks you get right on the first try.
What you're looking at: fund pages like the ones in a brokerage app, for made-up funds based on real ones. "30 years later" numbers use $200 a month from 1995 to 2024 at the S&P 500's real yearly returns, with dividends, minus each fund's expense ratio. For active funds, they assume the managers exactly matched the S&P 500 before fees, which is kinder than what most really did.
The logic, step by step.
Four small formulas explain where your money goes in an index fund and what the fee costs.
Step 1: A company's weight
Divide the company's market cap by the market cap of every company in the index added together.
- A 3-company index
- Company A is worth $600 billion, B is worth $300 billion and C is worth $100 billion, so all three are worth $1,000 billion. A's weight is $600$1,000 = 60%, B's is 30% and C's is 10%.
Step 2: Your money in one company
Multiply what you put in by the company's weight.
- Your $10
- $10 × 8.6% = $10 × 0.086 = $0.86 in Nvidia.
Step 3: The yearly fee
Multiply your balance by the expense ratio, written as a decimal.
- $10,000
- At 0.03%: $10,000 × 0.0003 = $3. At 0.64%: $10,000 × 0.0064 = $64.
Step 4: Your return after fees
Take the fund's return and subtract the expense ratio.
- A 10% year
- At 0.03%: 10% − 0.03% = 9.97%. At 0.64%: 10% − 0.64% = 9.36%.
Worked example: $10,000 for 30 years
- The setup. You invest $10,000 once and leave it for 30 years. The market averages 10% a year.
- Cheap index fund. It grows 9.97% a year: $10,000 × 1.099730 ≈ $173,000.
- Average active fund. It grows 9.36% a year: $10,000 × 1.093630 ≈ $146,500.
- The difference. $173,000 − $146,500 = $26,500, lost to a fee that looked like less than 1%.
Why can't most pickers beat the index?
Here's a neat piece of logic from the economist William Sharpe. Add up every investor who owns U.S. stocks and you get the whole market. So before fees, the average invested dollar earns exactly the market's return. Index funds earn that return. That means the pickers, as a group, also earn the market's return before fees, and some win only because others lose. After their higher fees, the average picker has to fall behind the index. It isn't bad luck. It's arithmetic.
A meadow survives what a single crop can't.
In Minnesota, the ecologist David Tilman spent years measuring grassland plots that had different numbers of plant species. When a severe drought hit in 1987 and 1988, the plots with many species lost far less of their plant growth and bounced back faster than plots with only a few.
What you're looking at: an illustration of the idea, not Tilman's data. Both fields are in the same drought. On the left, every plant is the same kind, so they all wilt together. On the right, there are many kinds, so some wilt but most of the field keeps growing.
Why this sticks. One stock is a field of one crop: one bad season can wipe it out. An index fund is the meadow. Some companies wilt every year, but others keep growing, and when a plant dies, a new one takes its spot, just like the S&P 500 swapping a shrinking company for a growing one.
The page you'd copy down.
- Index: a list of companies that measures part of the market. S&P 500: about 500 big U.S. companies, about 80% of the market's value.
- Fund: a pool of many investors' money. Index fund: a fund that buys every company in an index instead of picking.
- Market-cap weighted: weight = company's market capall market caps. Your money in a company = what you put in × weight.
- ETF: trades all day like a stock (SPY, VOO, IVV). Mutual fund: priced once a day, sometimes with a minimum (FXAIX, SWPPX, VFIAX).
- Expense ratio: the yearly fee as a percent of your balance. Yearly fee = balance × expense ratio. Return after fees = return − expense ratio.
- Active fund: managers pick stocks. About 92% of big-company active funds trailed the S&P 500 over the 20 years through 2024. Passive investing: copying the index.
Fill in the blanks
Grab a friend or a study group.
Fee hunt
Each person looks up one fund's expense ratio: VOO, a target-date fund, or a fund from a bank's website. Work out each one's yearly fee on $10,000 and rank them from cheapest to most expensive.
Pickers vs. copiers
Half the group argues for an active fund with a star manager, half for an index fund. Each side gets two minutes. Then everyone votes, using the SPIVA numbers.
Name the top 10
Try to guess the 10 biggest companies in the S&P 500 from memory. Then look up an S&P 500 ETF's top holdings and see how many you got.
Just you and your money.
These stay on this device. Nobody else sees them.
Exam-style questions.
Written the way a college exam would ask them. Each right answer on the first try is worth 10 xp.
On the job: you're the financial advisor
Your client is 25 and will invest $300 a month for 40 years in her 401(k), a retirement account you'll learn about later in this unit. Her plan offers two funds. Fund A is an S&P 500 index fund with a 0.04% expense ratio. Fund B is an active large-company fund with a 0.75% expense ratio that beat the S&P 500 last year.
Your task: work out what each fund would charge in a year on a $50,000 balance, and each fund's return after fees in a year when the market earns 10%. Which fund do you recommend, and why?
See a model answer
Yearly fee on $50,000: Fund A: $50,000 × 0.0004 = $20. Fund B: $50,000 × 0.0075 = $375.
Return after fees in a 10% year: Fund A: 10% − 0.04% = 9.96%. Fund B: 10% − 0.75% = 9.25%.
Recommendation: Fund A. Fund B has to beat the market by 0.71% every year just to tie, and about 92% of active big-company funds trailed the S&P 500 over 20 years. One good year doesn't change that, because last year's winners rarely stay on top.
From one fund to your first trade.
What you're looking at: a map of where this lesson fits in the course. Read it left to right: the lessons that come before, this lesson in the middle, and the later lessons that build on it.
- Before · Unit 5What a stock is
- Before · Unit 5Why invest at all?
- You are hereIndex funds
- Next · Unit 5Open a brokerage account
- Later · Unit 5Buy your first $10
- Later · Unit 5401(k) and Roth IRA
- Later · Unit 5When the market drops