Insight into the Index Calculation

Index is a value that is used to figure out the alteration in the price change of its relevant constitute within a period. However, it is difficult for the Index Company to handle the host of numerals as it is hectic and weighing causing inefficiency. Thus there arise an urgency for one value. To know the concept of Index Development you need to have an insight into the Index Calculation. This article intends to inform you the handy formula that you can use so as to calculate the index value. Here is a little insight into the Index Calculation.

Index divisor is just a simple point for the varying values of constituents that provides an initial point to begin the calculations. With the help of this you can get an initial value by a simple division. Most of the time it is taken to be constant which changes only on addition of securities or due to actions of the corporate including the adjustment of share. If you have the index divisor in hand it becomes easy to calculate the daily cap-weighted index value.

The formula for Index Calculation is as follows:

Index value = Σ (market cap of securities) / index divisor

This is the elementary formula for the final index value calculation. For using this formula you need to know the value of market cap of securities as well as the value of the index divisor. In order to calculate the index divisor, you have another formula.

In order to calculate the index divisor you can use the following formula:

Index divisor = total market value/ index value

So now when you know both the values you can easily calculate the Index value.

All in all, Index divisors do not solve just this purpose but has a lot more to offer. This lets you know the impact of a security price change on the total index. So, I guess the article was helpful to you as it gave you the exact way to compute the index value without having to follow a much confused way.

Source : https://thematicindex.tumblr.com/post/166349888659/insight-into-the-index-calculation