Following Essential Lesson 2, use the “The Basics of Non-Traditional Indexes” and “A Closer Look at Non-Traditional Index Funds” sections of the FINRA article to extend students’ understanding of how indexes are constructed. Emphasize that indexes use rules to determine which securities are included and how they are weighted. Compare traditional market-capitalization weighting with alternative approaches, such as equal weighting or weighting based on other factors. Reinforce that different construction and weighting methods can cause indexes to represent different market exposures and produce different performance results.
- Note: This resource does not explain price-weighted indexes. Briefly explain that in a price-weighted index, stocks with higher share prices have a greater influence on the index than stocks with lower share prices. The Dow Jones Industrial Average is a commonly cited example.