The Nasdaq Composite Index reflects the value of all of the roughly 3,000 common stocks listed on the Nasdaq stock market. The formula takes into account each company's market capitalization and share price.
The Nasdaq assigns every company on the exchange a "share weight" based on the company's market capitalization, or the total value of its shares. The larger the company, the greater the weight and the greater the effect a change in its share price will have on the Nasdaq Composite Index. Every company's share weight is multiplied by its share price, and all companies' results are added together. That sum is then divided by a number called, appropriately enough, the divisor.
Companies are continually joining the Nasdaq Stock Market, dropping off the exchange, merging, splitting their stock and taking other actions. If the index didn't have a mechanism to account for these changes, its value couldn't be tracked consistently over time. The mechanism it uses is the divisor, which is adjusted regularly so the value of the Nasdaq Composite Index before such an event and the value after it are the same.
Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.