For someone who is just starting out to invest on their own there are a lot of terms and meanings that they will need to learn before they can confidently invest in the market. One of the first things they should learn is the difference between mutual fund investing and an index fund investment. First off what both of them have in common is that they are both a collection of stocks or made up of different stocks from different companies. Even though you will be buying one mutual fund or one index fund you will actually be buying a number of different stocks. One of the reasons they are so popular is because it allows anybody to diversify (diversify is another term that the new investor should familiarize themselves with before investing) their investments cheaper and safer than it would otherwise.
The difference is what makes up a mutual fund and what makes up an index fund. What stocks make up a mutual fund depend on what stocks the person or persons running the mutual fund decide to buy. There are usually some rules in place on what they can and can’t buy for example all of the stocks have to be on the S&P 500 or in the Dow ect. but other than that they will be able to buy any stocks and at what percentage of the whole fund that they think is best. Index fund investing on the other hand is simply trying to match the performance of a certain fund. For example again the S&P 500, so instead of buying any stocks that they want in the S&P 500 they will buy exactly what is in the S&P 500 so that the performance of the fund will be exactly the same as the performance of the S&P 500.
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