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Ok, so this week we saw
the Dow and the S&P bounce all over the place.
What does that mean? What
is the Dow? The S&P 500? The Nasdaq? All
three are market indices.
They are attempts to summarize how the stock
markets did.
The Dow is the oldest and
best known of the market indices. It was
started in 1896 with 12
stocks. It now tracks 30 large “blue chip”
companies. The Dow is a
price weighted index. That means that the price
of the stock determines
how much weight a stock will have. Price
weighted averages are really
nothing more than the average that you
learned in elementary school
math classes. Add up the prices and divide
by a number. The number
is called the divisor.
Market indices must be regularly
adjusted to stay representative and to
deal with mergers and delistings.
To prevent a stock split
or new firm from changing the value of the index,
the divisor is adjusted
upward or downward to keep the overall index value
constant.
Most newer market indices
are market-value weighted. For example the S&P
500 is a market value weighted
index. This is easier in one way: not
adjustment need be made
for splits.
for more check out:
http://www.financeprofessor.com/introcorpfinnotes/marketindicies.html
and for the latest
divisor number:
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