A headline such as “the index rose one percent” sounds like a single fact, but two indices can reach the same number in very different ways. AFG-Management, a leading multi-asset platform, names the S&P 500, NASDAQ, DAX, Nikkei and TA 35 among the index markets on its site, which makes it a handy starting point for a question every index follower meets sooner or later: what is this number actually counting?
A headline such as “the index rose one percent” sounds like a single fact, but two indices can reach the same number in very different ways. AFG-Management, a leading multi-asset platform, names the S&P 500, NASDAQ, DAX, Nikkei and TA 35 among the index markets on its site, which makes it a handy starting point for a question every index follower meets sooner or later: what is this number actually counting?
One Number, Two Different Constructions
An index is one figure that summarizes a group of stocks. The AFG-Management FAQ describes a stock index as the combined price of a group of stocks, expressed against a base number. What that short definition leaves open is how the combined price is built, and the answer changes from one index to the next.
Two of the indices named on the AFG-Management markets pages show the contrast clearly. The Nikkei 225 counts share prices. The S&P 500 counts the value of the shares that investors can actually trade.
The Nikkei 225 Counts Prices
According to the Nikkei Stock Average guidebook, the index is calculated as the sum of adjusted stock prices divided by a divisor. It is built from 225 stocks listed on the Tokyo Stock Exchange Prime Market, and each one enters through its share price, scaled by a price adjustment factor.
The guidebook describes this as a price-weighted method. The consequence is direct: a higher-priced stock moves the index more, whatever the size of the company behind it.
The divisor has a quiet job. It is adjusted when constituents are added or removed and after events such as stock splits, so the index level does not jump when no market prices have moved.
The S&P 500 Counts Tradable Value
The S&P 500 is weighted by float-adjusted market capitalization. S&P Dow Jones Indices explains the float part in its index mathematics methodology: closely held shares are excluded because such shares are not available to investors, and each company’s counted shares equal its total shares multiplied by an investable weight factor.
A company’s pull on the index therefore follows the size of what the public can trade. Its share price alone says very little about how much it matters.
A Small Illustration
Take two imaginary indices that each hold three companies, and let one company rise ten percent in each. The figures are invented for illustration and describe no real index.
- Price-weighted: shares priced at 100, 50 and 10 sum to 160. A ten percent rise in the 100 stock adds 10, and in the 10 stock adds 1. The percentage move is the same, and the effect is ten times larger.
- Float-adjusted market value: one company makes up 40 percent of the index value and another makes up 2 percent. A ten percent rise in the first lifts the index by 4 percent. The same rise in the second lifts it by 0.2 percent.
Both indices moved because one company moved. What differs is which company can move them, and that depends entirely on the construction.
What This Means When Following Index Markets
Points do not travel well between indices. A move of a few hundred points in a price-weighted index and the same move in a market-value index describe different things, so percentage changes and the names behind them are the better guide.
The same logic reaches derivatives. The AFG-Management FAQ defines a CFD as a derivative that gives exposure to the change in value of an underlying asset. For a derivative on an index, the underlying is the index’s own calculation, so knowing how the index is built is knowing what the exposure follows.
That is useful for a trader choosing among the index markets AFG-Management lists. Each name on that list carries its own rulebook, and the rulebook is published by the index provider.
Three Questions Before Following Any Index
- How is each company weighted? The provider’s methodology document says whether the answer is share price, market value, float-adjusted value or something else.
- Which few names do most of the moving? A large move in a price-weighted index often traces back to a handful of high-priced stocks.
- What happens when the list changes? Additions, removals and splits are handled by adjustments such as the divisor, and the methodology explains how.
A reader who follows the index markets listed by AFG-Management can answer all three in a few minutes with the provider’s own documents, and every index headline will then carry more information than the number alone.
