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Get Started in Shares by Glen Arnold

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How are indices calculated?

A market index is simply an aggregate value of a group of shares tracked over time. But the way in which these are calculated varies; you can do the aggregating in different ways.

The Dow Jones

The first index, the Dow Jones Industrial Average (DJIA, the Dow), was created over 100 years ago. Charles Henry Dow gathered together the prices of 12 large US shares and simply averaged the prices (the statistic was published in the Wall Street Journal).

If one company in that list had a market capitalisation 20 times greater than another, that was ignored – it was purely based on share price. Later, the metric was expanded so that now 30 shares are included in the Dow. To be precise, we should say that the Dow is not an index ...

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