Options Trading For Dummies
Book image
Explore Book Buy On Amazon
A financial index is a measuring tool of prices for groups of stocks, bonds, or commodities. A change in one stock translates into index changes. Some examples are:
  • When a high-priced stock declines in a price-weighted index, it leads to bigger moves down in an index when compared to declines in a lower-priced stock. The Dow is an example of a price-weighted index that is affected more by Boeing (trading near $100) than Pfizer (trading near $25).

  • A market-cap weighted index, such as the S&P 500, is impacted more by higher market capitalization stocks regardless of price. Even though Microsoft may only be trading at $30 per share, its market cap is huge — about $290 billion. When it moves up or down it creates a greater change in the S&P 500 than, say, Amgen, which trades at $55 per share, but only has a market cap of approximately $64 billion.

  • All of the stocks in an equal-dollar weighted index should have the same impact on the index value. In order to keep the index balanced, a quarterly adjustment of the stocks is required. This prevents a stock that has seen large gains over the last three months from having too much weight on the index.

About This Article

This article is from the book:

About the book author:

Dr. Joe Duarte is a financial ­writer, private investor and trader, and former money manager/president of River Willow Capital Management. In addition to Options Trading For Dummies, he is the author of Trading Futures For Dummies and Market Timing For Dummies. Visit his website at joeduarteinthemoneyoptions.com

This article can be found in the category: