How are Indexes calculated?
There are two mainly used methods do calculate indices: a) capitalization-weighted method (e.g. CCMP, SPX) and b) price-weighted method (e.g. DJ Indu). See description of method for both below. Further, but less often used, is the float-adjusted capitalisation method, which does just that, adjust for the % of free-float of the companies. And last but not least, a lot of cap-weighted indices are separately calculated as equal-weighted, in order to extract some extra information. a). CAPITALIZATION-WEIGHTED A capitalization-weighted index measures the change in the market value of the index components. In this type of index the sum of all the market values (market value = price x outstanding shares) divided by the index divisor equals the index value. Example: outstanding stock price shares market value A 10.00 x 50.00 = 500.00 B 5.00 x 75.00 = 375.00 C 15.00 x 10.00 = 150.00 1025.00= total market value b) PRICE-WEIGHTED A price-weighted index is designed to measure the change in the pri
