How is a share index computed?

Answer 1

Indexes are generally computed by adding together the prices of the stocks that are in the index and performing some kind of math calculations on them. I think what those calculations are varies by index. For the Dow Jones Industrial Average, the calculation is done by adding together the price of the 30 stocks in the index and then dividing by a number (currently 0.123017848) which compensates for all the stock splits, spinoffs, etc. that have occurred over time. The first referenced link provides more information about Dow Jones Indexes.

Standard & Poors uses a different method. Instead of just adding up the prices of the stocks in the index, they add the market capitalizations (i.e. price times number of shares outstanding) before dividing by the number that adjusts for splits. The second referenced link provides more information about how S&P calculates indexes.
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