HOW AN INDEX IS PRICED?
Indices often serve as barometers for a given country, region, or specific sector and benchmarks against which financial or economic performance is measured. The way we calculate the value of an index is by weighting which is the relative importance of items when combined, for example the percentage of a portfolio or index that a given stock represents. There are three ways to weight indices they are:
- Price-Weighted Index – A stock index in which each stock affects the index in proportion to its price per share.
- Market-Share Weighted Index – A stock index in which each stock affects the index in proportion to its number of shares outstanding.
- Market-Value Weighted or Market Capitalisation Weighted Index – A stock index in which each stock affects the index in proportion to its market value.
Market capitalization is quickly becoming the most important and accurate method of indexation.
| CREATING A LIVE INDEX | The fast cash or live index is one of the major tools that all stock index traders use to accurately follow the underlying stock market upon which the futures market is based. Typically, an exchange will publish their cash prices every minute or every 30 seconds. This means that any trader that has a fast cash of their own, will be seeing market movements live while every other trader will only see the cash market move every minute or 30 seconds. To replicate an index and have it calculated in real time, you will need several different items. First you will need to know the market capitalization of each stock in your index, a live price feed of each of those stocks, and finally the index divisor available from the index publisher. With this information, you can create an index that calculates in real time. For additional help in constructing your index, both exchanges and publishers can guide you in the right direction. |
| INDIVIDUAL STOCKS | What affects the individual stocks within an index will in turn affect the main index. There are many forms of valuing stocks, and overleaf we are going to briefly explain those techniques. |