Indexes

• Various agencies compute and report the level of dozens of different stock indexes. The most well-known are the Dow Jones Industrial Average (DJIA) and the Standard & Poor's 500. Exchanges report on a selection of their securities, and investment companies track market segments like the smaller companies found in the Russell 1000 and Wilshire 5000 indexes.
  
  

Computing Points

• Companies that maintain the indexes report the index levels in points, which begin as a sum of the prices of the stocks included in the index. They divide this point total by a number that accounts for the quantity of stocks and any required adjustments. Some indexes use a simple sum of the prices while others scale each price according to the size of the security's underlying company. These two approaches are price weighting and market-value weighting. With price weighting, each stock price has an equal influence on the index. In market-value weighting, the market value of a company determines how much influence it has on the index. Here, the larger the company, the more heavily it factors into the index.
  
  

Adjustments

• Index adjustments maintain continuity, so that changes in the makeup of the group of stocks don't cause sudden shifts in the point value. The major reasons for adjustments are to account for stock splits and for replacements of one stock for another. When a stock splits two-for-one, its share price will drop to half the original value. The index adjusts for this by doubling the new price of the stock. If a $50 stock replaces a $10 stock in an index, an adjustment accounts for this by dividing the new stock share price by five to keep the index the same.
  
  

Dow Jones Industrial Average

• The DJIA is one of the most widely followed stock market gauges. But because it uses only 30 stocks, it is not the best indicator of general market performance. The DJIA is a price-weighted average, so it starts out as a sum of the prices of the select group of stocks. Originally, the point value of the average was this sum divided by the number of stocks. The divisor has evolved over the years, and today it is not 30 for the number of stocks in the group, it is about 1/8. The DJIA point level is equal to the sum of the Dow component prices multiplied by about eight.
  
  

S&P 500

• A better indicator of the overall stock market is the S&P 500, which tracks the prices of the largest 500 companies traded in the U.S. The stocks it includes make up 3/4 of the value of all U.S. equity shares. The index is market-value weighted, which means it starts with a sum of each stock price multiplied by its company's capital value. Standard & Poor's then divides this result by an adjustment quotient. The quotient was originally set at an arbitrary level to produce a point level of 10, but it has evolved.