A hypothetical portfolio encompassing all possible securities would be too broad to measure, so proxies such as stock indices have been developed to serve as indicators of the overall market's performance. In addition, specialized indices have been developed to measure the performance of more specific parts of the market, such as small companies. It is important to realize that a stock price index by itself does not represent an average return to shareholders. By definition, a stock price index considers only the prices of the underlying stocks and not the dividends paid.
Dividends can account for a large percentage of the total investment return.
One characteristic that varies among stock indices is how the stocks comprising the index are weighted in the average. Even if no explicit weighting is applied when calculating an average, there may be an implicit one. While a one dollar price change in one stock in a simple stock price index will have the same effect as a one dollar change in any other stock, a given percentage increase of a higher price stock influences the index more than a corresponding percentage increase of a lower price stock. For this reason, indices that are based on the simple summation of stock prices are referred to as price-weighted . In a price-weighted index, a change in the stock price of the largest company in the index would influence the average no more than an equal change in the stock price of the smallest company in the index.