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How is an Index Calculated?

Are you wondering if different types of indices are constructed in the same way? No, an index can be built in three different ways depending on the weights assigned to each constituent stock.

Sensex is a capitalization-weighted index wherein both the number & price of the shares of a company are factored in. In such indices, larger companies with higher market cap weigh more. Dow Jones is a Price-Weighted index in which stocks with higher prices have higher weightage.

In both cases, fluctuations in the price of a higher weighted stock contribute more significantly to the value of the index. However, in the Equal Weighted Index, the same amount of money is invested in each constituent stock, and the impact is consistent.

Did you know there is an S&P 500 Equal Weight Index too?

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