I'd like to invest in a non-retirement investment account - I'm looking at the Vanguard 500 Index Fund Admiral Shares product specifically.
However I don't know how gains work, exactly - my understanding is that when I buy into this fund, I become the owner of a share of the fund (similar to a share in a publicly traded company?) and as the fund changes in value so do my shares in the fund: if the fund increases in value then my own net worth (non-liquid) also increases; however because a share of the fund is not considered actual currency it means I'm not taxed when the fund increases in value (as I would be with bank interest paid to me); it is only when I cash-out my shares back into USD (if I make a profit) do I pay tax on the capital-gain.
I understand funds themselves are responsible for investing in companies - but what happens when the fund chooses to de-invest in a company and then invest in another? Obviously it sells its shares first (resulting in a "profit", hopefully) but how is that taxed? As it's a fund rather than a company is it making a taxable profit? If the money is immediately re-invested is that considered an expense and so no taxable event happened?
...if funds can do that, why can't I do that as an individual? I note that if I buy $250 worth of shares in Massivesoft Inc, then sell them for $1000 later I'm taxed on the $750 profit even if I immediately re-invest it in Banana Computer Inc and the $750 never touches my bank account. What happens if I "trade" one share for another (of equivalent USD value) and nothing is actually converted to currency?