FTSE is a market capitalization weighted index, comprising the largest 100 companies. HSBC @ £96.424bn being the biggest, followed by Vodafone @ £91.053bn etc... Therefore both the price and any movement in the number of issued shares can effect the calculation.
On the other hand, the components of the Dow Jones are selected at the discretion of the editors of The Wall Street Journal. There are no pre-determined criteria except that components should be established U.S companies.The Dow Jones Averages are unique in that they are price weighted rather than market capitalization weighted. Their component weightings are therefore affected only by changes in the stocks' prices, in contrast with other indexes' weightings that are affected by both price changes and changes in the number of shares outstanding.
The indexes are just what their names imply: basic, easy-to-calculate averages. To calculate one of the averages, simply add up the prices of its components on their primary exchanges and divide the sum by the divisor.
Over the years, adjustments have been made to the divisors to ensure the continuity of the averages after corporate actions such as spin-offs and stock splits. As a result the divisors are no longer equal to the number of components in each of the averages, as would be expected. For example, after 100 years of adjustments, the current divisor for the Dow Jones Industrial Average, available here, is less than one.
The formula for calculating a divisor change is as follows:
- Divisor to be effective on trading session t+1
- Divisor on trading session t
- Components adjusted closing prices for stock dividends, splits, spin-offs and other applicable corporate actions on trading session t
- Components closing prices on trading session
The FTSE Index is the weighted average of the 100 top UK companies. Each company is given a percentage weighting of the index which on average is 1%. However the stronger the company then the higher the weighting. For example British Petroleum plc (a larger company) may have a weighting of 5.15% whilst Granada plc (a smaller company) may have a weighting of 0.32% and so on.
So for example, if the index stands at 4400 on a specific day then BP plc represents 226.6 (ie 5.15% of 4400). So if BP stock moves up by 3% from say £6 a share to £6.18 whilst all other 99 company's share prices remain the same, then the Index would move up from 4400 to 4406.7 ie (4400 + (226.6 x 3%).