How S&P 500 market index works (Part 2); Index divisor

Both formulae use an index divisor. An index divisor is a number chosen at the inception of a price-weighted stock market index.

An index divisor is a standardization number used to calculate the nominal value of the price weighted market index. A price weighted market index is a stock index in which each company included in the index makes up a fraction of the total index proportional to that company’s price per share. It simply means adding the price of each stock in the index and dividing it by the total number of companies that determine the index value.

Examples of an index divisor is the DOW divisor. In its basic form, an index divisor is an arbitrary number that is first defined when an index is published.

The index divisor gives an investor an easy way of tracking movement in the index over time. The divisor may be adjusted if there are material changes to the index that affects its value.

As at 14th of August 2020, the value for the S&P 500 index divisor was 8269.11

Source: Bloomberg.com

References:

Langager, C. (2019, June 29). How is the Value of the S&P 500 Calculated? Investopedia. https://www.investopedia.com/ask/answers/05/sp500calculation.asp#:%7E:text=The%20S%26P%20500%20Deconstructed&text=The%20S%26P%20500%20Index’s%20value,float%20market%20capitalization%20weighted%20methodology.&text=This%20calculation%20takes%20the%20number,share%20price%2C%20or%20market%20value.

S&P Dow Jones Indices. (2020, July). Index Mathematics Methodology. S&P Global.

This site uses Akismet to reduce spam. Learn how your comment data is processed.