# What do the points in a stock market index epresent?

For instance after the GFC, the ASX All Ords fell to about 3200.

It last closed at 5777.2 (http://www.asx.com.au/)

But what do these points actually mean in terms of what they represent?

The All Ords Index consists of the 500 largest companies by market capitalisation listed on the Australia Stock Exchange.

Each stock in the All Ords. Index is given a weighting based on its market capitalisation. As the price of the stocks within the All Ords. Index change, so does the points on the index itself.

The Index is more sensitive to changes in the larger capitalised stocks due to their larger weighting in the Index.

Example:

If a company has a weighting of 10% and its price goes up by 10%, and all other stocks in the Index don't go up or down, then this will cause the All Ords Index to go up by 1% (10% of 10%).

• when you say 'market capitalisation' is this global market cap? In that case, if the all ords index falls, doesn't that mean another market somewhere makes a gain? – piman314 May 31 '15 at 9:32
• No the market capitalisation of each stock in the Index. The All Ords Index is based on Australian stocks not global stocks. – Victor May 31 '15 at 9:36
• Got it, but even with that said, for the all ords to fall in market cap means that something else must have a higher market cap, relatively than it did before? Or am I misunderstanding some crucial point. – piman314 May 31 '15 at 9:45
• Again, what makes the index go up or down is due to the stocks in the index going up or down. It has nothing to do with anything else outside of the index going up or down in the opposite direction. – Victor May 31 '15 at 9:53
• What you say is right, but I think it would be good to add a clarification that index numbers calculated in the way you describe are essentially in arbitrary units. In particular, their raw values cannot generally compared across indexes. So if Index A is at 3000 and Index B is at 4000, that doesn't necessarily mean that Index B is "doing better". I think this is an important take-home message: the actual number doesn't have any useful meaning except relative to previous and future values of the same index. – BrenBarn May 31 '15 at 17:54