What Is a Stock Market Index?
In short
A stock market index is a number that tracks the combined performance of a defined group of shares, calculated by a published rule from the prices of its components.
An index turns many prices into one figure. A provider defines a group of shares, for example the large companies of a country or the stocks of one exchange, publishes the rules for choosing and weighting them and calculates a value from the component prices. The value is expressed in points and not in a currency, and it cannot be bought directly: funds, futures and other products that track an index are separate instruments.
Indices differ in how components are weighted. A price-weighted index such as the Dow Jones Industrial Average adds up component prices, so a share with a higher price has more influence. A market-capitalization-weighted index weights each company by its market value, and most of them are float-adjusted, which means only the shares available for public trading are counted. Some indices, such as the Nasdaq-100, also limit the weight of individual components.
A divisor keeps the index continuous when shares are added, removed or split, so that a change of membership does not move the value by itself. Providers publish price-return versions, which reflect only price changes, and total-return versions, which also reflect reinvested dividends; a figure quoted without that detail can refer to either. When indices are compared, the weighting method, the version and the currency should be checked, because each changes the reported number.
Formula
Price-weighted: Index = sum of component prices / divisor
Cap-weighted: Index = sum(price * shares in float) / divisor
Divisor change: new divisor = old divisor * (market value after the change / market value before the change)The formula is shown as code; N stands for the number of bars or periods.
How Lzzo.com shows it
On Lzzo.com index values are shown in points with the time of the last observation. Each index page links to its tracked constituents: a full table where the published member list is covered almost completely, and otherwise the names of the members that are tracked. An index page never shows a purchasable price.
Related guides
Sources
- S&P Dow Jones Indices, Index Mathematics Methodology
- S&P Dow Jones Indices, Dow Jones Averages Methodology
- Nasdaq, Nasdaq-100 Index Methodology
- Z. Bodie, A. Kane and A. J. Marcus, Investments (McGraw-Hill)
Primary and official sources, named as plain text.