Averages are calculated from the prices of the selected stocks within an index (as we see below) and are used by investors as a way of gauging the performance of the different markets that the stock indices reflect. There are two main ways of calculating the value of stock indices: a price-weighted index or a capitalisation-weighted index.  Without doing a deep dive into the mathematics behind these calculations, in simple terms they differ in this way: A price-weighted index uses the price of the individual stocks to determine the weighting of the stock to determine the index value.  A capitalisation-weighted index uses the value of the company to determine the weighting of the stock in the average.  The Dow Jones Industrial Average is an example of a price-weighted index. The S&P 500 a capitalisation-weighted index.