The term “average stock market” doesn’t refer to a specific formula, but it relate to how stock market averages or indices are calculated. For instance, the Dow Jones Industrial Average (DJIA) and the S&P 500 are two popular stock market indices that represent averages, but they are calculated differently.
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Dow Jones Industrial Average (DJIA): This is a price-weighted average, meaning stocks with higher prices have more influence on the index’s performance. The formula for calculating the DJIA is:
[ \text{DJIA} = \frac{\text{Sum of the prices of all 30 stocks}}{\text{“Dow Divisor”}} ]
The “Dow Divisor” is a number that is adjusted for stock splits and dividends to maintain the consistency of the index.
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Standard & Poor’s 500 Index (S&P 500): This index is a market capitalization-weighted index, meaning companies with larger market caps have a bigger impact on the index’s value. The formula is more complex and involves the total market cap of all 500 companies in relation to a base period.
[ \text{S&P 500} = \frac{\text{Sum of the market caps of all 500 companies}}{\text{Base Period Market Cap}} \times 10 ]
These formulas provide a general idea of how stock market averages are calculated. However, it’s important to note that each index has its own methodology and nuances.