The method of figuring out a particular inventory market benchmark worth by summing the costs of included shares after which dividing by a divisor is a technique that provides higher-priced shares better affect on the index’s worth. For instance, if Inventory A is priced at $100 and Inventory B is priced at $50, Inventory A could have twice the impression on the index’s motion as Inventory B, whatever the variety of excellent shares every firm possesses.
This strategy was one of many earliest developed strategies for making a market indicator and presents a easy technique for monitoring total market course. Its significance lies in its historic context, providing a rudimentary view of how market values had been initially understood. Nonetheless, this strategy may be simply distorted by inventory splits or adjustments in a inventory’s worth unrelated to the corporate’s precise worth, necessitating frequent divisor changes to take care of the index’s continuity.
