How to Calculate the Base Divisor for a Market Index

How to Calculate the Base Divisor for a Market Index
••• Jupiterimages/BananaStock/Getty Images

A market index is a portfolio of securities that represent a broad section of the overall stock market. The market index makes it easier for analysts to track trends in market investments over time and provides a basis for comparison against single-stock portfolios. There are two main types of stock indexes: price weighted and market cap weighted. The latter is the calculation for a market index. Some analysts like to calculate the base divisor of the market index to re-create or duplicate the market index in a portfolio, but most calculate the market index as an exercise in business school.

Research the market price and number of shares outstanding for all the stocks in the index. This depends on the index. Every index has a different set of stocks. For instance, the Dow is an index of 30 stocks. Contact the management of the index to know for sure.

Multiply the number of shares outstanding by the price of the stock for each company held in the index. This number is referred to as the market capitalization. For instance, if a stock with 10 million shares outstanding has a price of $1, the current market cap is $10 million.

Sum all the market caps together. Assume the total market cap for the portfolio is $100 million.

Determine the market index price. This price is published on a daily basis by the index. Popular indexes are published in the financial section of most newspapers. Assume the market index price is $10,000.

Calculate the base divisor. Divide the market cap by the market index price for the current base divisor. For instance, if the current market cap is $100 million and market price of the index is $10,000, the base divisor is also $10,000.