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Meaning / Definition of

Weighted Stock Index

Categories: Finance,

In weighted stock indexes, price changes in some stocks have a much greater impact than price changes in others in computing the direction of the overall index. By contrast, in an unweighted index, prices changes in all the stocks have an equal impact.A price weighted index, such as the dow jones industrial average (DJIA), is affected more by the changing prices of higher-priced securities than by changes in the prices of lower-priced securities. Similarly, a market capitalization weighted index, such as the nasdaq composite index, gives more weight to price changes in securities with the highest market values, calculated by multiplying the current price per share by the number of outstanding or floating shares. A capitalization weighted index may also be called a market value weighted index. The theory behind weighting is that price changes in the largest or most expensive securities have a greater impact on the overall economy than price changes in smaller-cap or less expensive stocks. However, some critics argue that strong market performance by the biggest or most expensive stocks can drive an index up, masking stagnant or even declining prices in large segments of the market, and providing a skewed view of the economy.

Featured term of the day

Definition / Meaning of

Consensus Recommendation

Categories: Stocks,

A consensus recommendation for an individual stock compiles ratings from a number of analysts who track that stock. The recommendation is expressed as either the mean or median of the separate recommendations. Calculating the consensus is a multi-step process that involves grouping the terms that analysts use to recommend buying, selling, or holding, generally into three or five categories, assigning a scale, and computing the result either by averaging the numbers for the mean or identifying the median, which is the point at which half the views are higher and half are lower.A consensus recommendation provides a snapshot of current thinking about a stock, so it can serve as a benchmark against which you can compare a single analyst's opinion to gauge how mainstream it is. But like any statistical mean or median, a consensus recommendation can distort strong differences at either end of the scale. Further, if the report accompanying the consensus view doesn't point out significant differences in the viewpoints of the various analysts it includes, you won't be able to tell where the most respected analysts stand on the stock.In addition, you should be aware that the consensus recommendation for any given stock might differ from one research company to the next. This is because the mathematical formula that assigns weights to the individual recommendations will vary, based in part on how many levels of differentiation the research company uses and how it interprets the words that analysts use to express their opinions.

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