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How Financial Indexes Are Constructed

Part of the Trading Options For Dummies Cheat Sheet

To help understand financial index changes, you should know how indexes are built. Indexes are not created equal (well . . . one is). Financial indexes are constructed in three different ways:

  • Price-weighted: Favors higher-priced stocks

  • Market cap-weighted: Favors higher-cap stocks

  • Equal dollar-weighted: Each stock has same impact

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