Stock market index - Financial definition
Financial acronyms
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Concise definition of the term stock market index
A stock market index is an index formed for the purpose of measuring a stock market’s performance by grouping a number of selected shares traded on a stock exchange and comparing their value to that on a stated date in the base year.
Comprehensive definition of the term stock market index
Stock market indexes are calculated using a variety of methods. Three common types of index calculations are:
- Market-capitalization weighted The stocks held in the index are weighted by their market capitalization. This results in the largest companies of the index having a disproportionate impact on the movement of the index. The S&P 500 is an example of a market cap weighted index.
- Price weighted In a price-weighted index, stocks with higher share prices have a larger weight within the index than shares with lower share prices. The Dow Jones Industrial Average is an example of a price-weighted index
- Equal weight In an equal-weighted index, all of the stocks in the index have the same weight, irrespective of their market capitalization or relative price.