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What are the Limitations of Stock Indexes?
Posted in BVI | EN | Labs | Indices

Within the realm of financial analysis, stock indexes are everywhere, but they are not without their limitations. Owing to the methods in which their value is calculated, sometimes using an index as an objective measure of economic performance may prove to be shortsighted. To learn more, read on.

The Limitations of Stock Indexes

Capitalization-weighted Indexes

Price-weighted Indexes

Disadvantages of the different stock indexes in summary

Capitalization-weighted stock indexes Large-cap companies have significantly more influence in determining index value but are not sensitive to stock splits
Price-weighted stock indexes High-priced companies have more influence in determining index value, but stock splits can affect this
Frequently asked questions

Within a price-weighted index, how would a high-priced stock affect market value?