Heres an example of constructing an index base value:consider stock a trading at $10 with 1,000 shares outstanding. consider stock btrading at $12 with 10,000 shares outstanding. consider stock c trading at $20 with5,000 shares outstanding.market capitalization value for:stock a = $10,000 ($10 x 1,000)stock b = $120,000 ($12 x 10,000)stock c = $100,000 ($20 x 5,000)total value = $230,000if i want to set the base year of $230,000 to 1,000 points, i would divide the number by$230:$230,000 / $230 = 1,000in order to calculate an index from day to day or year to year, i would need to calculatethe market capitalization of each stock and divide the sum of those market caps by230:one year later:stock a increased to $14stock b increased to $20stock c increased to $22assuming the number of shares didnt change, the market capitalization total for thesethree stocks would now be $324,000. if i divide this by my divisor of $230, the indexvalue has increased from 1,000 to 1,408.69.an index is a statistical indicator that provides a representation of the value of thesecurities that constitute that index (i borrowed this definition). the real purpose of theindex is to act as a barometer for the given basket of stocks that are included in theindex. the index essentially reports the value change for the selected basket of stocksin question and provides one with insight into the general trend of that basket of stocks.so when the index in my example above increased from 1,000 to 1,408.69, one mightsay that the market increased by 40.86% in the year. if you compare the startingmarket capitalization of $230,000 to the ending value of $324,000, youll see that theincrease in value is 40.86%.when you see these kinds of numbers on tv, you should realize that the market valueof the stocks as a whole has increased, and you should be aware of the general trendof the value change over the time period.
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