Stock Index

From Reuters Financial Glossary

A market index is a numerical representation of the way an entire market has performed relative to some 'base' reference date in the past. They are calculated in two ways â?? weighted or unweighted. Unweighted indices are simple arithmetic or geometric averages. An arithmetic average adds up all the percentage changes in the prices of the constituent stocks and then divides that by the number of stocks in the index. The geometric average is a very precise measurement, calculated by multiplying all the prices of the shares in the index and taking the nth root where n is the number of shares you are averaging. It is much less frequently used than an arithmetic average. In Weighted indices, certain stocks carry a greater weighting than others, usually based on their market value or capitalization.

See also: Capitalization