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Stock Indexes


Investors have embraced stock indexes. There are now stock indexes for every conceivable investment style, trend and market segment. A market index is a method of tracking the price performance of a group of securities. There are a myriad of investments that allow you to participate in the price action of particular indexes. If your investment is tied to an index, then understanding the underlying calculations is important.

Calculation Methods

  • Price Weighted – The aggregate individual prices of the stocks in the index are added together, and divided by the number of companies. A divisor is used to adjust for stock splits, stock dividends, etc. The focus is the stock price, not the size of the company. The higher stock prices in the index have a greater impact then the lower priced stocks. The DJIA is priced weighted.
  • Market Capitalization Weighted – Market capitalization weighing occurs when the weight of each security in the index is in proportion to the stock’s capitalization. More emphasis is given to the large, high priced or overvalued companies, than to the smaller or undervalued stocks. Most indexes are market capitalization weighted.
  • Unweighted – The unweighted method tracks the performance of the underlying stocks, where equal dollar amounts are invested in each security. The Value Line Composite Index is the best example of an unweighted index.

Description of the Major Indexes

Dow Jones Industrial Average (DJIA) –Developed by Charles Dow in 1896, it is a group of 30 well established industrial blue chip companies, which cover most of the economic activities in the United States. It excludes Transportation and Utility stocks, as they are followed under separate indices. The DJIA is the oldest of the indexes, and was kept simple; Charles Dow just took the total of 12 companies’ stock prices and divided by the number of companies. Of the original 12 companies, only GE remains in the index.  In 1928 the index was increased to 30 companies. The Dow became immortalized on October 28, 1929 and October 29, 1929 as the Dow dropped 24.5% in two days. (It did, however, recover 12.3% the following day). The plummeting of the Dow is historically viewed as the watershed event that ushered in the Great Depression.   

NYSE Composite Index – The NYSE Composite Index tracks the price performance of all the companies listed on the New York Stock Exchange, and is weighted by market capitalization.

NASDAQ Composite Index - This index tracks the price measurement of all the stocks listed on the NASDAQ stock exchange. The index is market-capitalization weighted.

NASDAQ-100 Index – The NASDAQ-100 Index tracks the price performance of the 100 largest non-financial stocks listed on NASDAQ, and the index is based on a modified market capitalization calculation. Among many eligibility requirements, it includes only stocks that have an average minimum daily trading volume of 200,000 shares. Rebalancing is reviewed quarterly.

S&P Index – The S&P 500 index is weighted by market capitalization and tracks the performance of 500 of the most widely held and most respected U.S. based companies. Rebalancing is reviewed monthly.

Value Line Composite Index – This index measures the performance of the 1700 companies covered in the Value Line Investment Survey. The index is based on an unweighted index and assumes equally weighted positions in all 1700 stocks.

Russell Indexes – The Russell 2000 Index measures the performance of the smallest 2000 companies in the Russell 3000 index. The very small micro-capitalization stocks are not included in the index. The Russell 3000 includes approximately 98% of the U.S. market. These indexes are market capitalization weighted.

Wilshire Indexes – The Wilshire 5000 Total Market Index tracks the performance of the 5,000 plus U.S. headquartered companies that have readily available price data.  The Wilshire 4500 Completion Index includes all the securities in the Wilshire 5000, except for those companies that make up the S&P 500. These indexes are market capitalization weighted. They also have float-adjusted versions, believed to be more useful benchmarks, which include only those shares that are available to investors.


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