By gaining a clear understanding of how indices are created and how they differ, you will be on your way to making sense of the daily movements in the marketplace.
Here we’ll compare and contrast the main market indices so that the next time you hear someone refer to “the market,” you’ll have a better idea of just what they mean.
The Dow Jones Industrial Average (DJIA) is one of the oldest, most well-known and most frequently used indices in the world. It includes the stocks of 30 of the largest and most influential companies in the United States. The DJIA is what’s known as a price-weighted index. It was originally computed by adding up the per-share price of the stocks of each company in the index and dividing this sum by the number of companies—that’s why it’s called an average. Unfortunately, it is no longer this simple to calculate. Over the years, stock splits, spin-offs, and other events have resulted in changes in the divisor, making it a very small number (less than 0.2).
Read more: An Introduction To Stock Market Indexes http://www.investopedia.com/articles/analyst/102501.asp#ixzz4gBVACwQp
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