Before learning how to calculate stock index, it is necessary to know what stock index means. A stock index is a measure to find out the performance of underlying stocks. As the stock index changes, it means that the value of stocks is changing. It is the statistical indicator which is used in the measurement and reporting of changes in the market value of a group of stocks or shares.
The market is differently tracked by different stocks indices. It depends upon three factors. Those are:
(1) The averaging method which is used to establish the index
(2) Is the index broad based or narrow based
(3) Whether the assigning of weight of averaging method is based on market price or market capitalization.
Definition: A stock index is like a folder of securities that represents an overall stock market. Indices show trends in investing patterns. Normally they are expressed in terms of a change from an original value.
Calculation of stock index is a method to measure any section of the stock market of a particular industry.
Calculation of stock index: There are two ways to calculate stock indices. They are:
- price weighted index such as the Dow Jones industrial average
- Market cap weighted index such as the NASDAQ, Standard and Poor’s 500 etc.
Calculation for price weighed index
- Find the prices of the stocks in the index. In the Dow Jones average, only 30 stocks are focused to calculate their index.
- You should look for prices on various investment websites.
- Add the prices of each stock.
- Now you have to divide the result by the Dow Jones industrial average divisor. This divisor balances out different types of stocks over various industries.
- The equation for calculation is as follows:
Sum of stocks / index divisor = index average.
Calculation for market cap weighted index
- Find out the market capitalization of all stocks inside the index.
- By multiplying the number of outstanding shares of stocks by the prices of stocks, we can reach the market cap. Suppose there are 1 million shares of a specific stock with price of Rs 10 in the market, then the market cap is said to be Rs 10 million.
- The entire market cap amounts together.
- In the final calculation, you have to divide the total amount of market caps by the current divisor. It is to be noted that the divisor changes time to time and it is issued by actual stock exchange.
- The formula for market cap weighted index is as follows:
Sum of market caps / divisor = stock index average
A stock index is actually a method to measure a section of the stock market. Generally indices are cited by news channels or financial firms which are used as benchmarks to find out the performance of stocks.
The Dow Jones 30 stocks are as follows:
- Alcoa
- American express
- American international group
- AT & T
- Bank of America
- Boeing
- Caterpillar
- Chevron
- Citigroup
- Coca Cola
- DuPont
- Exxon Mobile
- General Electrics
- General Motors
- Hewlett Packard
- home depot
- Honeywell
- Intel
- IBM
- Johnson & Johnson
- JP Morgan Chase
- McDonalds
- Merck
- Microsoft
- Pfizer
- Procter & Gamble
- United Technologies
- Verizon communication
- Wal Mart
- Walt Disney
These 30 stocks are the base of Dow Jones stocks indices.
Stock index is a very important part of our financial system. It is very necessary to learn how to calculate it. I hope from this article you will be benefited.
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