When we watch business news on the television we often encounter how various stock indices performed during the day from various stock markets locally and worldwide. Among these various indices are US Dow Jones Industrial Average (DJIA 30) and US S&P 500 being the most widely watched indices. Have you ever wondered what it means when the news say DJIA dropped by 2% and S&P 500 increased by 3%? How did they arrive at these percentages?
The greatest difference between the indices worldwide lie in how the index components are weighted. Two common examples of these are the price weighted and value weighted calculations.
DJIA 30 is an example of a price weighted index that simply sums the share prices of the 30 largest and most widely held public companies in the US divided by the number of shares in the index. The number of shares are adjusted to account for the stock splits. DJIA was first published in 26 May 1896 at the index price of $40.94 with only twelve stocks in the index and fast forward to 30 May 2008, the index now stands at $12,638. Out of the original 12 companies only General Electric is currently part of the average.
S&P 500 is a value weighted index of 500 Large Cap Companies mostly Americans where each stock in the index is weighted according to its market capitalisation. The higher the market capitalisation of a Company, the bigger its weight in the calculation of the index. The S&P 500 was first published in 1957 with only 90 Companies called S&P 90. The index stood at $100.38 on 4 June 1968 and at $1,400.38 on 30 May 2008.
Another famous price weighted index other than DJIA 30 is the Nikkei 225 for Japanese equities. All other indices are mostly value weighted like FTSE 100 (FTSE pronounced as ‘footsie’) in London and DAX 30 in Germany. There are times when the direction of these two types of indices are different. The other might be going up and the other might be going down. So whenever you see these indices on the TV or in the internet from now on you may decide which one better represents the performance of the market or of your investment if you have any!
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I find this post very informative.
Hmmm, what about the Philippines?
Philippine Stock Exchange has PSE Composite Index also known as Phisix. It’s a value weighted index of the 30 largest listed companies in the exchange.
O Mr. Wilson! You are a bright person. You are very bright. You are a CPA. Why aren’t you working in a bank?
I never knew how they calculated it before. Thank you for your post. I just came across your website Mister Wilson. It’s very enlightening.