What is a Composite Index?
A composite average is an average of the components of other averages.
How Does a Composite Index Work?
For example, the Dow Jones Composite Average is a price-weighted index of the companies that compose the Dow Jones Industrial Average (DJIA), the Dow Jones Transportation Average (DJTA) and the Dow Jones Utility Average (DJUA). There are 65 stocks in the Dow Jones Composite Average. They are the same stocks included in the Dow Jones industrial, transportation and utilities averages. The index is price-weighted, meaning that the stocks with the highest prices have the most influence on the index.
Why Does a Composite Index Matter?
Like the Dow Jones Composite Average, a composite average is a broad measure and a convenient way to evaluate the performance of underlying indexes. For instance, the Dow Jones Composite Average gives a good indication of the overall direction of the largest companies in the United States: it includes some of the titans of the transportation, utility, financial services, technology, retail, entertainment and consumer goods industries. As such, the is not just a measure of performance; some consider it an economic indicator as well.