What’s a stock index number and how to compute it
Changes in its value serve as a barometer of happenings that have a bearing on the performance of financial securities. Why do we need an index number?
As of July 2012, about 1,650 companies were listed on the National Stock Exchange (NSE). If someone were to give you information on the price changes or returns for these companies from one day till the next, in the form of 1,650 values, can a rational mind deduce meaningful conclusions about the performance of the market? Clearly, it would be impossible and we would seek a summary statistic.
There is more than one method for computing a stock index number. The common approaches are: the price-weighted technique, the value-weighted technique and the equally weighted method. Irrespective of the computational method, the first step in constructing a stock market index is to decide how many companies ought to be represented, and which ones in particular.
Although the number of companies represented by an index is usually constant, the composition of the indices will typically change over time as the global economy evolves. For instance, the Dow Jones Industrial Average (Dow), which is by far the best known
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