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/biz/ - Business & Finance

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55233728 No.55233728 [Reply] [Original]

wait, so what the fuck do i actually *own* when i buy index funds?

i know index funds are tracking indexes and indexes are a collection or groups of stocks

am i buying """""stocks""""" in an index that represent ownership of actual real literal stocks? so in other words im sort of buying an index token that represents actual real world stocks?

so when i sell an index fund the fund will sell an amount of stocks equal to my investment worth of their 'tokens' and pay me or what?

>> No.55233797

>>55233728
And index is an avg of assets. After a company hits a large enough valuation it's able to be included in the index. When you buy an index you are effectively buying exposure to everything in that market basket. It's less risky but also slower. Often individual companies in the index out perform the index. Pick the right trends and wait essentially.

>> No.55233804

Just buy LTC, if you want boomer tier

>> No.55233818

>>55233797
Yes but what are the actual components of an index?

Am i literally buying and holding 0,000231 apple stocks, 0.0001932 coca cola stocks?

or am I buying a 'token' from the fund that say i own that amount

like am i LITERALLY owning the stock or am i sort of owning it in a second degree

>> No.55234007

>>55233818
You’re more likely buying shares of an exchange traded fund (ETF) and the ETF owns the stocks.

>> No.55234030

>>55234007
right so sort of a representation of the stocks, but not the actual stocks?

like i do own the stocks technically, but i literally hold a piece of an index fund which then owns the actual stocks

>> No.55234085

>>55234030
bro wait till you find out about FTDs (they're legal btw)
Anything held in a brokerage account is owned by DTCC and you're given beneficial 'rights' to.
Learn your place and stop asking questions piggie. You'll own fractions of fractions of baskets of nothing and be hapy.

>> No.55234086

>>55234030
you own a claim (the ETF in your brokerage account) on a claim (the brokerage holding your ETF) on a claim (the index the ETF tracks) on a bunch of claims (the components of the index) on a claim (the asset manager who actually makes the ETF components track the index by buying and selling stock)

If you want even more layers of abstraction just for shits and giggles you can buy long dated ATM calls using margin collateralized with funds from a HELOC

>> No.55234128

>>55234086
but the fund is still using my money to buy the actual stock and hold it right?

so my purchase triggers that they issue me a "receipt" for holding shares included in the index, and they buy and hold those shares

so when i want to sell i give them my receipt/claim back, they sell the actual combination of stocks and give whatever money back to me

>> No.55234174

>>55234128
in theory, yes. There can be divergences between different index derivatives (i.e. SPY is higher/low than ES1! futures contract), but they are generally short lived and quite small. The main risk inherent in an ETF indexing system is the act of rebalancing itself potentially affecting the price of the index in a sort of incestuous loop, given enough volume and thin enough liquid. Stocks are generally super liquid and able to handle daily volume so events like that are rare.

>> No.55234208

>>55234174
last question, index funds sometimes rebalance or even swap out stocks in the index they track (SP500 prime example)

how does that even work in the long term? say you bought an index 30 years ago, some of those companies might not even exist anymore, have been heavily rebalance in terms of weight in the index or may flat out have been replaced

how does that work?

is the value, composition and weight of stocks in an index matched to the time of purchase forever or what?

like it wouldnt really make sense if apple had the large weight it has today, when you bought your index 20 years ago

>> No.55234282

>>55234208
you can read more about the creation/redemption process of an etf if you want to learn more about it. generally they are based on historical pricing changes and other correlations. depending on who created the etf they have slightly different algos to balance and track everything. in your example if companies get replaced in the s&p500, take DISH as an example, it was recently replaced in the s&p 500 by PANW, the etfs rebalance to track that. these etf creators have teams of mathematicians trying to figure out the right formulas doubt anyone here can just sum it up for you in 1 or 2 sentences.

>> No.55234336

>>55234282
alright appreciate it

i dont know it just feels kind of hollow holding a piece of a fund that then holds a bunch of stocks, i know its just semantics and i know you're technically own the stocks i guess but not literally right

>> No.55234578

>>55234085
Technically it’s Cede and Co. that owns the shares, but that’s a distinction pretty much nobody cares about