Stock indices perform important functions in the global investing universe. They serve as benchmarks of equity markets and therefore as good indicators of economic situation and investor sentiment. Stock indices are widely used in analyses and investment decision making. There are three common methods of stock index construction: Of these three methods, the price weighted index method is the simplest and the oldest.

A price weighted stock index is in fact the simple arithmetic average of prices of all stocks included in the index. For example, consider a price weighted index containing 3 stocks:. Over time, price weighted stock indices are adjusted for stock splits and other changes in the index constitution the divisor of the index changes accordingly.

Stock Indexes – Finance Professor

If you had Google , priced , and Citigroup , with a share price of 4. Is Google more than hundred times more important to the economy and to the stock market than Citi is?

Stock Investing - Index Divisor

The best known example of price weighted stock indices is the good old Dow Jones Industrial Average , which is calculated as the average of share prices of 30 big companies. The index was started in and originally contained 12 stocks.

Of these 12 stocks only one — General Electric — is still part of the DJIA index today Because of the long history and adjustments to stock splits, spin-offs, and other events, the divisor of the Dow Jones index known as Dow Divisor is not 30 — it is about 0. Top of this page Home Tutorials Calculators About Contact.

The Agreement also includes Privacy Policy and Cookie Policy. If you don't agree with any part of this Agreement, please leave the website now. All information is for educational purposes only and may be inaccurate, incomplete, outdated or plain wrong. Macroption is not liable for any damages resulting from using the content.

No financial, investment or trading advice is given at any time. Price Weighted Stock Index Calculation and Biases. More Weighted Average Cost of Capital WACC Value Weighted Stock Index: Construction, Problems, and Adjustments Why You Need Weighted Average for Calculating Total Portfolio Return Weighted Average Method Cost Accounting.