How Market Capitalization and Free Float Shape Index Values
Summary
The document corrects an attempt to reconstruct an equity index by multiplying constituent share prices by published weights and summing them. It explains that an index such as the FTSE 100 is based on company market values rather than a simple weighted average of share prices. Market value depends on share price and shares outstanding, and the response notes that free float can reduce the shares counted in the index when holdings are not freely available for trading.
The exchange points to the index provider’s calculation methodology and a worked example, but does not reproduce the full formula or calculation. It therefore supplies the central conceptual distinction without enough detail to compute an exact index level. Index divisors, constituent changes, and the provider’s complete weighting rules are not covered in the answers shown.
Key ideas
- An index level cannot generally be reconstructed by summing constituent prices multiplied by weights.
- Index weighting is related to constituent market value, based on price and shares outstanding.
- Free-float adjustments can reduce the shares counted in a constituent’s index weight.
- Exact reconstruction requires the provider’s methodology, including calculation details not reproduced here.
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Full text
# Calculate price of index from underlyings (weightings included)? # Calculate price of index from underlyings (weightings included)? I have a day's worth of LSE data (FTSE100 companies) and I also have their weightings for the FTSE100. Ignoring the net present value of money, how do I calculate the current value of the FTSE? I have multiplied the price of each underlying by its weighting and summed up but im not getting anything sensible? To confirm, here are some of the weightings I have (circa July 2013): - Royal Dutch Shell(A): 5.00384 - Royal Dutch Shell(B): 3.513914 So is it just: (VOD_price x 5.658561) + (RDSA_price x 5.00384) + (RDSB_price x 3.513914)..... or do I need to divide the weightings by 100 and do like above? ## Answer by Louis Marascio (score 2) https://quant.stackexchange.com/a/9645 You need to read up on how the FTSE is calculated. See this link: http://www.ftse.com/Indices/UK_Indices/Downloads/uk_calculation.pdf. It involves the market value of companies, not simply a weighted price average. There is a detailed example in the document I linked, which happens to be the very first Google result for "ftse index calculation". ## Answer by Alex C (score 0) https://quant.stackexchange.com/a/9681 When a person (or group) owns a large block of stock the FFF is going to be less than 1.0. For example if Mr. Bill Gates owns 20% of MSFT, the FFF for MSFT is going to be 0.8. The weighting is based on FFF times the value of shares outstanding. So because MSFT has such a large market capitalization (shares * price) it has a bigger weight that ACME, a small company that no one has heard of.
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