There are two major ways that stock indexes are calculated. One form of calculation is called a price-weighted index. The Dow Jones Industrial Average is an example. The other form of calculation is a market-cap-weighted index. The Nasdaq and Standard and Poor's 500 are examples of indexes that are calculated using market-cap weighting. Doing some math will allow you to calculate the price of each type of index.
Things You'll Need
Locate the prices of the stocks in the index. The Dow Jones focuses on only 30 stocks in order to calculate their index. Since it is one of the most popular, use its method for example purposes. You can look up prices on various investment Websites such as CNBC.com (the Dow 30 are listed below in the "tips" section).
Add the price of each of those stocks together.
Divide the final result by the Dow Jones Industrial Average Divisor. The divisor is meant to balance out different types of stocks over various industries in the Dow 30. It also takes into account things such as stock splits. From time to time, the divisor is adjusted. (The current divisor is listed below.) The equation for calculating the price weighted index is:
Sum of Stocks / Index Divisor = Index Average.
Determine the market capitalization of all stocks within the index. The market cap is reached by multiplying the number of outstanding shares of stock by the price of the stock. As an example, if a stock has a price of $10 and there are 1 million shares on the market, then the market cap is $10 million.
Add all of the market cap amounts together.
Divide the sum of the market caps by the current divisor. Like the Dow Jones, the divisor will change over time and is issued by the actual stock exchange. The formula reads:
Sum of Market Caps / Divisor = Stock Index Average
Tips & Warnings
- The Dow 30 (in alphabetical order) are: Alcoa, American Express, American International Group, AT&T, Bank of America, Boeing, Caterpillar, Chevron, Citigroup, Coca-Cola, DuPont, Exxon, General Electric, General Motors, Hewlett-Packard, Home Depot, Intel, IBM, Johnson & Johnson, Morgan Chase, McDonalds, Merck, Microsoft, Pfizer, Procter & Gamble, United Technologies, Verizon, Wal-Mart and Walt Disney
- Photo Credit stock image by Michael Shake from Fotolia.com
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