Index components definition
An index’s components are the individual companies that are listed on a stock index. For example, Apple is a component of the Nasdaq stock index.
Components are also known as constituents. There is no set number of components an index must have.
The number of components in an index is significant, though, as each will contribute to the overall price of the index. Indices sometimes have the number of components included in their name. For instance, the FTSE 100 is comprised of 100 components.
Here are some major global stock market indices and the number of components each is made up of:
Dow Jones – (US) 30
FTSE 100 – (UK) 100
DAX – (Germany) 30
CAC 40 – (France) 40
Hang Seng – (Hong Kong) 50
How do an index’s components impact its value?
The combined value of all an index’s components makes up the overall value of the index. This means that a price change in any one of its components can impact the index’s value.
Indices work in different ways. Some apply a market capitalisation weighting on their components, meaning a stock with a large market capitalisation will impact the index more than a stock with a smaller one.
Other indices work by applying a price weighting on their components. A price-weighted index applies a weighting for each of its components based on their share price. A strong price change of one of its larger stocks will influence the index’s price more than the same price change of one of its smaller stocks.