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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 prices of the component stocks. In this type of index, price is the only underlying variable taken into account. The index is derived by totaling the current prices of the stocks and dividing the sum by a divisor. We will use the example below throughout this text to explain how different indices are calculated and how to adjust the indices for different situations.
Example:
stock price
A 10.00
B 5.00
C 15.00
30.00= sum of all prices
Hope this helps.
Regars,
Andre
murthysuresh <money@xxxxxxxxxxxxxx> wrote:
I would like to know how indexes like compq are calculated. If i want
to setup a sector based index for eg
Sector A may have tickers
AA
BB
CC
DD
If i setup a index for A based on the closing price of
(AA+BB+CC+DD)/4. I may be wrong because the market contribution of
all four tickers may not be equal.
Any ideas?
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