What is a Stock Index?

 

What is a stock index?

A stock index is measurement of the stock market by looking at a group of stocks instead of individual stocks. Its value is calculated from the prices of stocks that make up the index, also called the index’s constituents.

How many stocks are there in a stock index?

It depends on the index – most popular indexes have 30 stocks to 1000s of stocks.

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What are some of the popular stock indexes?

  • USA
    • Dow Jones Industrial Average (30 stocks)
    • S&P 500 (500 stocks)
    • Nasdaq Composite Index (all stocks on the NASDAQ)
  • Other popular indexes
    • London’s FTSE 100 or the “Footsie” (100 stocks)
    • Hong Kong’s Hang Seng (50 stocks)

Can the constituents of a stock market index change, or they stay the same?

A stock index is created to correctly represent the market or a section of the market, so its constituents can change from time to time depending on the changes in the market.

If the index goes up or down, does it mean all its stocks have gone up or down in price?

No. The change in an index’s value is a combined effect of the changes in price of all its stocks.

How is the value of the stock index calculated?

There are different ways of calculating the value of an index.

Price Weighted

Each stock’s weight in the index is decided by the price of an individual stock. For example, if stock A is worth $100, and stock B is worth $200, then stock B would have double the weightage in the stock index than stock A because it has double the price.

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Market Capitalization Weighted

Each stock’s weight in the stock index is decided by the market capitalization of each constituent. For example, if the company that has stock A has $1 million market capitalization and the company that has stock B has a $3 million market cap, then stock B would have a higher weight in the stock index because its market capitalization is higher.

Podcast: What is a Stock Index?

Stock Index - Stock Market Index
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