Suffice it to say that not everyone agrees that index investing is superior to active management and research, and this long-standing debate rages on. Widely used indexes help create a prestigious image for these companies, in addition to the income that sale of the data generates. Index calculation is a very interesting topic, because indexes are calculated in different ways. It is important for consumers to understand the calculation methods involved for the indexes they refer to, because the calculation method has a profound impact on results. In simple terms, we want to know what is being measured.
Most stock indexes give more weight to larger companies.
Since larger companies are weighted more heavily in these indexes, the index is not a valid indicator of the price of the average stock in the index. However, these indexes do give some indication of the price levels of the average investor's holdings, since theoretically there will be more investors in the larger companies. The Value Line Composite is a broad stock market index that weights the performance of a broad sample of approximately 1,700 stocks equally. Thus, it is more indicative of the broad stock market, because smaller stocks receive weighting equal to the big guys. Ironically, the most widely quoted index, the Dow Jones Industrial Average, relies on the most curious method of calculation.