To construct a price-weighted index for stocks X, Y, and Z, initially compute the total price by adding the individual stock prices and then dividing by the number of stocks. For example, with initial prices of P64, P22, and P15, the sum is P101, resulting in an initial index value of 33.67 when divided by 3. At time T+1, given new prices P80, P36, and P24, the sum becomes P140, and the new index value is 46.67. The percentage change in the index is ((46.67-33.67)/33.67) * 100%, calculated as a 38.58% increase. This demonstrates how average price changes affect the index, emphasizing individual stock price impact rather than market value .

In a price-weighted index, such as the Dow Jones Industrial Average, stocks are weighted by their individual prices. This means that higher-priced stocks have a greater influence on the index's value and movements. For example, a P100 stock would have more impact on the index value compared to a P30 stock because its price changes would cause more significant fluctuations in the average price computed by the index. Essentially, the index value represents the arithmetic average of the prices of the included stocks, adjusted by a divisor that accounts for changes like stock splits .

An unweighted index calculates its values by averaging percentage changes across stocks without regard to their absolute prices or market values. Unlike price-weighted indexes that are swayed by higher-priced stocks and value-weighted indexes that reflect market cap changes, unweighted indexes treat all price changes equally, focusing on relative performance rather than actual financial impact. This results in an index sensitive to equal percentage shifts in prices, providing a simplistic view that may miss the deeper market implications evident in weighted alternatives, making it more suitable for studies on stock behavior than market valuation .

Security-market indexes serve multiple purposes. They provide a simplified representation of the overall market or specific sectors, making them useful benchmarks for investors to compare the performance of individual stocks or portfolios. Indexes can also guide investment fund strategies, inform economic policy through market trend analysis, and facilitate derivative contracts such as futures and options, which rely on benchmark indexes for pricing. Moreover, they provide information about market sentiment and serve as a tool for passive investment strategies, such as index fund management, by replicating the performance of entire markets or sectors as represented by the indexes .

A value-weighted index is calculated based on the market capitalization of the included stocks, which is the product of their current stock prices and the number of shares outstanding. To adjust for corporate actions such as stock splits, the index recalculates the market value for the affected company, ensuring that the overall index value remains consistent despite these structural changes. The focus is on preserving the proportional representation of each stock's market value in the index, maintaining the index’s continuity in reflecting market capitalization changes .

Several factors are crucial when constructing market indexes, including the weighting method (price-weighted, value-weighted, or equal-weighted), the selection criteria for the securities included (such as their size, liquidity, and sector), and the geographic or sectoral scope of the index. Differentiation among indexes is largely based on these factors. Price-weighted indexes prioritize stocks with higher prices, which can lead to disproportionate influence of high-priced stocks regardless of the company's overall size. Value-weighted indexes, on the other hand, give more weight to companies with larger market capitalizations. Equal-weighted indexes treat each security equally, emphasizing the number of securities over their market values. The choice of methodology affects how the index responds to market changes and its suitability for different investment strategies .

Price-weighted indexes, focusing on average stock prices, tend to be unduly influenced by higher-priced stocks, which can distort index movements despite underlying company market capitalizations. In contrast, value-weighted indexes prioritize overall market value, offering a comprehensive view of total financial value rather than per-share price, reducing volatility from high-priced stock fluctuations. Differences arise because price-weighted indexes can disproportionately reflect price changes in a single or few high-value stocks, while value-weighted indexes inherently balance sector and size variations, integrating broader market performance factors beyond mere pricing metrics .

An unweighted price index treats each stock with equal importance, basing index changes solely on the percentage change in stock prices rather than their market values or prices. In an unweighted index, each stock's price change has the same relative impact. For instance, if stocks ABC and XYZ, respectively priced at P50/share with 50 million shares outstanding and P30/share with 15 million shares outstanding, both undergo a 15 percent price change, the impact on the index is equal despite differences in share quantity. The equal treatment in percentage terms negates the influence of absolute share number disparity, highlighting the simple averaging effect in such indexes .

In price-weighted indexes, stock splits require adjustment to the divisor used to calculate the index value, ensuring that the split does not affect the index's continuity and that the average remains consistent. This adjustment prevents distortion due to physical changes in stock prices post-split. In contrast, value-weighted indexes adjust naturally for stock splits through recalculated market capitalization, as splits usually result in a corresponding adjustment of stock price and share count that leaves market value unchanged. While price-weighted indexes can see more volatility from splits due to their sensitivity to price changes, value-weighted indexes remain stable as long as the market value remains unaffected .

To construct a value-weighted index, calculate the market capitalization for each stock by multiplying current stock prices by shares outstanding, summing these values for a total market cap at both initial and final periods. For stocks X, Y, and Z, suppose initial market caps are X: P128M, Y: P330M, Z: P525M, totaling P983M. At T+1, updated market caps like X: P160M, Y: P540M, Z: P840M total P1540M, showing a substantial index increase. The percentage change is ((1540-983)/983) * 100%, indicating a 56.63% rise, which reflects overall market capitalization movement, emphasizing the relative size shifts within the market rather than solely price changes .