yeah, that part made sense to me. i understand the fees, etc. i guess i'm more unsure of mutual funds/indexes, and who cares if you're diversified if you're just testing the waters?
but thank you- you did explain yourself clearly.
General rules of thumb: you can invest in an individual company by buying its stock. For instance, you could buy a share of IBM for about $200/share right now. If you buy a mutual fund, you can pick the "type" of fund - some are tech funds, some are international funds, some are growth, some are dividend-yielding funds, etc. These funds are, generally, comprised of various companies - a tech fund may own IBM, Apple, eBay, Microsoft, etc. By buying a share of the mutual fund, you are, in effect, buying in to all of the companies. It is a way to diversify your investment, as opposed to having all of your eggs in one basket by buying only an individual, single stock. "Index" funds are funds designed to track a various index. For instance, the Dow Jones Industrial Average ("the Dow") is really an index of 30 companies, all of which are large (IBM, Microsoft, Bank of America, Caterpillar, Johnson & Johnson, McDonald's, etc.). It is designed to give you a broad spectrum snapshot of 30 of the leading companies - the theory being that as goes those companies, as goes the world because they are so large and in a variety of industries. You can buy an index fund that will track the Dow exactly. These funds have lower fees because the money managers don't really make any decisions - they simply track an index that is already established. Other indexes include the S&P 500, the Russell 2000, and others.
Diversification really only matters if you have serious money at stake. With $1000, and assuming you are young, you should just buy a company that you like. Track your investment, see what happens, learn about its competitors, see how those stocks compare with your own in terms of performance, try to figure out why they performed the way they did, etc. You will learn a ton about investing in general by going this route, and as you accumulate additional wealth, you will be better prepared to invest it in the market and elsewhere. Even if you lose the $1000 (and you won't lose it all unless the company you choose goes bankrupt), if you follow it this way, the knowledge you gain will be worth way more than the money you lose. And, since most stocks have appreciated over time, chances are if you hold the stock long enough, you will eventually have the opportunity to sell it at a profit.