How the stock indices are calculated

Stock indices are a reliable assistant in the hands of any trader. They allow you to get exhaustive information about possible movements in the market, using not absolute, but relative indicators. With their help, you can find out in advance how, for example, the CB currencies will change today, in which direction oil or valuable metals will move, which will help to react in a timely manner and go to the exchange at a successful moment. For a better understanding of what stock indices are, you need to understand the methodology of their calculation. This is what we talk about today.

Summification of the components of the index of assets

The first way is to summarize the components of the asset index. This method has been used for a long time, it is used by the oldest stock indices from the well -known ones. The technique looks as follows: the cost of the components is added, after which they are divided by quantity. Thus, it is possible to get an average value. The divider can increase or decrease, depending on the following factors:

• The merger of companies operating in the same sector;
• Absorption of shares;
• Division of securities.

Despite the fact that such a method appeared before the onset of the 20th century, it continues to be actively used by world-famous stock indices. Among the most famous “keepers of traditions” include the DJIA stock index (United States), Nikkei (Japan) and many others.

Establishment of market value

All relatively new indices prefer the second method of calculation. He was invented in the 20th century and gained wide popularity. Its essence lies in the substitution of indicators of the current value of securities at the market price of enterprises. The total number of shares of all companies acting in the market as an issuer must be multiplied, and then divided by an already calculated number. This number is unstable and regularly changing. The main factors affecting it are the events that have occurred with one or another issuer.

Each of these methods is quite simple, but there are also defects. To prevent them, leading stock indices use averaging. There are many methods by which this procedure can take place. For example, the use of a different number of shares in the calculation with the same value of securities.