where to invest ? what makes up an index

An index provides a measure of the value of a group of stocks.Indices are used extensively to measure change and volatility in areas of economic interest such as currencies, cpi, or unemployment. Stock indices are typically compiled by firms affiliated with the securities industry or exchanges, and are generally developed to mirror the broad market, a foreign market, or specific Sector. An index is monitored or benchmarked against the value at which it was initially set, and will reflect the market or particular industry only to the extent that the underlying issues are representative of that market or a industry. The values of the indices on which options are traded are updated and disseminated continuously throughout the trading day on the CBOE.

Investors can obtain real-time values from a broker or through any of the on-line quote systems.Indices are typically calculated as capitalization weighted, modified capitalization weighted, price weighted, or equal-dollar-weighted. In a capitalization weighted (value-weighted) index, the market price of each issue is multiplied by the number of outstanding shares in that issue; the total market capitalization is then divided by the base market divisor to arrive at the index value. In a capitalization-weighted index, the more highly capitalized issues are weighted more heavily than the less capitalized ones, and changes in the stock price of highly capitalized issues have a greater impact on an index's value. Modified capitalization weighted indices are intended to maintain as closely as possible the proportional capitalization distribution of a portfolio of stocks, while limiting the maximum weight for a single stock or group of stocks to a predetermined maximum. This rebalancing is accomplished by occasionally artificially reducing the capitalization of higher weighted stocks and redistributing the weight to lower weighted stocks. The net result is a weight distribution that is less skewed toward the larger stocks, but still does not approach equal weighting. The total capitalization of the portfolio remains the same.Price weighted indices are calculated by adding the prices of the component stocks and dividing by the base market divisor, without any regard to capitalization. Typically, the higher priced and more volatile constituent issues will exert a greater influence over the movement of a price weighted index. Equal dollar weighted indices assign equivalent influence to each component stock by representing them in approximate equal dollar amounts. These indices are rebalanced once per quarter to ensure that the components continue to have equal influence.

The Equity Scholar Team

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