What is a stock market index? How is it calculated?

hey guys how's it going today so today I

was gonna do a quick video I'm gonna try

to keep pretty basic on what an embassy

is or an index or specifically you know

what is the market so I'm gonna give you

the definition that I think is just the

easiest to understand the market or an

industry is essentially a representation

of how the stock market is doing as a

whole so quite often you'll hear in the

United States the Dow Jones or the S&P


so these are composites meaning they're

composed in many stocks and they've been

putting they've been put together by

different rating agencies in an effort

to just see how the market is doing as a

whole and what's kind of interesting

about these different indices is that

some are better than others and some are

more representative than others so I'm

gonna quickly go through the most

prevalent ones in the United States

the Dow Jones Industrial Average and the

S&P 500 and then I'm also going to

really talk about the TSX in Canada so

this is the Dow right here or you know

ten years here so it's a price weighted

index of 30 significant stocks traded on

the New York Stock Exchange and the

Nasdaq so something sometimes people get

that confused to the New York Stock

Exchange & ysc that's just the exchange

where the traders are trading the shares

that are actually in this composite same

with the Nasdaq so if you're a little

bit confused with that go back to my

video on what is a stock and I explain

that a bit so this is only thirty

companies and I just quickly let put it

here in a Excel spreadsheet so you can

say what I see what I mean here these

are actually companies that are in and

then the approximate price so when it

when I say it's a price weighted index

we had Apple that's 171 until it's

approximately 44 in buh-buh-buh they're

simply summed

and then they're divided by an index

divisor now I'm not gonna get into this

too much but the purpose of this is just

to ensure that when Apple splits like I

spoke about in my last video and stuff

like that that it doesn't have a

significant impact in the price of the

Dow and obviously this is not the price

that I right now this is just a an

example here so you can see how it's not

really representative and how Apple has

a pretty pretty big control over the

price that Dow but I mean this is just a

small example and one of the bigger

issues with the Dow here is that a $1

change in a very small price here will

actually have a greater effect than a $1

change on like say we have like a $10

stock here even though like the

percentage change of a larger company

might be more significant than the

smaller company I won't go into that too

much but the the main thing to take away

from this is that it's a price weighted

index meaning the price of the company

kind of determines what the index is

going to be as a whole all of them so

this is why I spoke about in my last

video why Apple actually split because

they might not have been allowed to be

in here and their price might have been

significantly higher so these are the

components of the dowel like I said

there's thirty of them you can lock them

up and that's basically when you see the

the Dow quoted in the news it's this

these companies price weighted to by the

divisor and it gives you an idea how the

markets doing in my opinion it really

doesn't because there's only 30

companies right a much better a much

better example is the S&P 500 right so

this measures the value of 500 of the

largest clock corporations in the United

States and again this is on the New York

Stock Exchange and the Nasdaq and this

represents about 80% of the US stock

market so it's pretty good indicator

and aside from it being a pretty good

indicator it's more representative so I

try to make this really simple for you

guys here this is evaluated index it's

not like a price weighted index so for

example here we have Apple 171 we have

approximately 5 billion shares

outstanding so this is their market cap

and in toe ba ba ba and these are all

summed and this gives the S&P 500 total

market capitalization as you can see

here say Apple has 63% weight in this

example that's 877 billion divided by

the total 63% I'm gonna make a note here

that this is also adjusted that these

numbers are adjusted because it's based

on what Apple started with my - what

it's at now divided by an index divider

but it's not really relevant because

once you do those calculations this is

how the weighting works so this is why

I'm showing you this and I don't want to

get into too much detail because it's

really not important it's just important

to understand how are the two different

writing and how they actually make how

they how these companies actually make

up the indices so here's an example to

show you why it's better so here I have

2% so this is a 2 percent increase in

Apple 171 to 174 and Western Digital 79

to 80 that's a 2 percent increase as

well so if you change 171 to 174 if you

just watch that bottom total it goes

from about 1.4 billion so say it's about

15 I won't put four trillion rather 15

billion dollar increase right 15 billion

dollars now if you take this one -

approximately 80 it's significantly less

there's 15 maybe 14 something billion

less at the market

goes up as a whole but that makes sense

guys right so this is only two percent

weight whereas this is sixty three

percent weight and you might think to

yourself well that's kind of similar to

the Dow but the Dow just based on price

this is based on actual value so it's

kind of a better indicator how much

wealth is being created because there's

five billion shares outstanding and

there this price so that's actually in

people's pockets and funds wherever

those shares are held right so just to

say that the price increases in this and

say it doesn't have very many shares

outstanding or whatever it's not really

a good indicator in the Dow because it's

just based upon the price right whereas

this is showing the wealth created so

when we saw that two percent increase in

Apple we saw the the index as a whole

increased significantly and that makes

sense too it's intuitive because more

wealth is being created right so this is

why this is a much better indication of

the are you being created in the market

because it's based on the weight of

these right so I hope that makes sense

but that's the main takeaway from those

two is why they're different and then

again there's 500 companies so it's much

more representative as well and the last

one I'm going to quickly go over here is

the TSX this is in Canada I'm going to

briefly go over this one that's

obviously on the toronto stock exchange

it is roughly 70% of the toronto stock

exchange so it's pretty represented

though and this one's based on a float

adjusted market capitalization which

basically means in this method the

market cap is determined by share price

the amount of shares outstanding and

it's very kind of similar to the S&P 500

so it's a better representation of the

market in Canada in my opinion so that

was just a quick video on what index is

what the market is as a whole when

people talk about the market I hope that

made sense I hope I didn't get too

complicated because it's not really

important in my opinion to get way too

complicated unless you're going to be

the dour calculating the sp500 so I hope

you guys found that useful and you have

a great day and I will see you in the

next one