How are the NASDAQ and Dow Jones indexes calculated?
The Dow and NASDAQ indices are calculated in different ways. The Dow is what is known as a price weighted index & the NASDAQ is a market capitalization weighted index. When people talk about the Dow Jones index, or the Dow, they are referring to the Dow Jones Industrial Average (DJIA). The DJIA is comprised of 30 of the biggest companies on the market. The Dow occasionally will drop and pick up different companies — but it doesn’t happen very often. (The last change to the list was in 2002 or 2003 when Eastman Kodak, Allied-Signal, and Intl Paper were dropped & Pfizer, Verizon, and AIG were added.) The DJIA is calculated by adding the current stock prices of these companies & then dividing the average by a divisor. Initially, the divisor was simply the number of companies in the index thus providing a simple average of the stock prices. The divisor has been modified over the years for the following reason: The DJIA is price weighted. It does not look at the relative values of the comp
