5.6 Stock Indexes & Averages

Canadian Securities Course CSC

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1 Introduction & Exam Overview

About the CSC Exams

2 Chapter 1: The Canadian Investment Marketplace

1.1 The Canadian Securities Industry & the Investment Dealer's Role 1.2 Financial Intermediaries: Banks, Trusts, Credit Unions, Insurers & Pension Funds 1.3 Financial Market Trends 1.4 Investment Capital, Financial Instruments & Financial Markets 1.5 Canadian Exchanges, ATSs, Dark Pools & the Order Protection Rule 1.6 Canadian Securities Regulators, the CSA & CIRO 1.7 Investor Protection: OSFI, CIPF and CDIC 1.8 Ethics, Standards of Conduct & the Client Focused Reforms 1.9 Conflicts of Interest, Complaint Handling & Remediation

3 Chapter 2: The Economy

2.1 Economics Foundations & Measuring Economic Growth 2.2 The Business Cycle & Economic Indicators 2.3 Inflation & Interest Rates 2.4 The Labour Market & Unemployment 2.5 The Bank of Canada & the Inflation-Control Target 2.6 Implementing Monetary Policy: The Operating Band, Market Operations & Transmission 2.7 Fiscal Policy, Deficits & the Challenges of Government Policy 2.8 International Finance & Trade: The Balance of Payments and the Canadian Dollar

4 Chapter 3: Features and Types of Fixed-Income Securities

3.1 The Fixed-Income Marketplace, Bond Terminology & Security 3.2 Protective Covenants, Retirement Provisions & Extendible/Retractable Features 3.3 Government of Canada Securities: T-Bills, Marketable Bonds & RRBs 3.4 Provincial & Municipal Debt and Strip Bonds 3.5 Corporate Bonds, Credit Spreads & Bond Ratings 3.6 Money Market Instruments, Floating-Rate Notes & International Bonds 3.7 Other Fixed-Income Securities & Reading Bond Quotes

5 Chapter 4: Pricing and Trading of Fixed-Income Securities

4.1 Bond Pricing, Price–Yield Relationships & Accrued Interest 4.2 Yield Calculations & Return Measures 4.3 The Term Structure of Interest Rates & Yield Curve Theories 4.4 Fundamental Bond Pricing Properties: Volatility Rules, Duration & Convexity 4.5 Bond Market Trading & Bond Indexes

6 Chapter 5: Common and Preferred Shares

5.1 Common Shares: Ownership Rights, Voting & Restricted Shares 5.2 Dividends, DRIPs, Stock Splits & Consolidations 5.3 Preferred Shares: Features, Cumulative Dividends & Taxation 5.4 Preferred Share Variations: Convertible, Callable, Retractable, Floating & Rate-Reset 5.5 Fundamental Equity Metrics & Ratios 5.6 Stock Indexes & Averages

7 Chapter 6: Equity Transactions

6.1 Order Types, Execution & Market Mechanics 6.2 Margin Trading: Long Accounts & Borrowing 6.3 Short Selling & Short-Margin Requirements 6.4 Trading & Settlement Procedures: T+1, CDS & Confirmations

8 Chapter 7: Derivatives

7.1 Derivatives: Role, Underlying Assets & Users 7.2 Options Fundamentals: Calls, Puts & Moneyness 7.3 Option Strategies & Risk Management 7.4 Forward & Futures Contracts 7.5 Rights & Warrants

9 Chapter 8: Corporations and their Financial Statements

8.1 Corporate Structures & Corporate Governance 8.2 The Annual Report, Accounting Standards & the Auditor's Report 8.3 The Balance Sheet & Income Statement 8.4 The Cash Flow Statement & Earnings Quality 8.5 Public Company Disclosure, Investor Rights, Take-Over Bids & Insider Trading

10 Chapter 9: Financing and Listing Securities

9.1 Government & Corporate Financing: Underwriting and Syndicates 9.2 The Prospectus Process, Stabilization & Purchaser Rights 9.3 The Exempt Market & Private Placements 9.4 The Listing Process: TSX, TSXV & Capital Pool Companies 9.5 Continuous Disclosure, Material Changes & Insider Reporting

11 Chapter 10: Investment Analysis

10.1 Methods of Equity Analysis & Macroeconomic Analysis 10.2 Fundamental Industry Analysis 10.3 Company Analysis: Competitive Advantages, Governance & the Dividend Discount Model 10.4 Discounted Cash Flow & Relative Valuation Multiples 10.5 Financial Statement Ratio Analysis 10.6 Assessing Preferred Share Investment Quality 10.7 Technical Analysis: Charts, Trends & Patterns 10.8 Technical Indicators, Volume, Breadth & Sentiment

12 Chapter 11: Portfolio Analysis

11.1 Measuring Investment Return 11.2 Measuring Risk: Types of Risk, Standard Deviation & Downside Measures 11.3 Portfolio Risk & Return: Correlation and Diversification 11.4 Beta, the Capital Asset Pricing Model & the Security Market Line 11.5 Portfolio Manager Styles: Equity & Fixed Income 11.6 The Portfolio Management Process: Objectives, Constraints & the IPS 11.7 Asset Mix, Monitoring, Performance Evaluation & Rebalancing

13 Chapter 12: Alternative Investments, Other Managed, and Structured Products

12.1 Alternative Investments: Structures, Fees & Liquid Alternatives 12.2 Alternative Strategies, Performance Measurement & Due Diligence 12.3 Segregated Funds, Labour-Sponsored Funds & Listed Private Equity 12.4 Income Trusts, REITs & Closed-End Funds 12.5 Structured Products: PPNs & Market-Linked GICs 12.6 Split Shares & Asset-Backed Securities

14 Chapter 13: Mutual Funds

13.1 Managed Products & Mutual Fund Structure 13.2 Pricing Mutual Fund Units: NAVPS & Forward Pricing 13.3 Mutual Fund Fees, Sales Charges & Unit Series 13.4 Mutual Fund Regulation, Fund Facts & Account Opening 13.5 Types of Mutual Funds & Fund Management Styles 13.6 Redemptions, Withdrawal Plans & Measuring Fund Performance

15 Chapter 14: Exchange-Traded Funds (ETFs)

14.1 ETF Origins, Structure, Tax Efficiency & ETF Facts 14.2 ETF Creation, Redemption & Arbitrage 14.3 Types of ETFs & Advanced Strategies 14.4 Comparing ETFs, Mutual Funds & Individual Securities

16 Chapter 15: Working with the Institutional Client

15.1 The Institutional Marketplace & Institutional Clients 15.2 Institutional Investment Guidelines, Styles & Restrictions 15.3 Buy Side & Sell Side: Trading Desks, Revenue, Clearing & Best Execution 15.4 Block Trading, Dark Pools & Algorithmic Trading

17 Chapter 16: Fee-Based Accounts and Working with the Retail Client

16.1 Fee-Based Accounts: Managed & Non-Managed Models 16.2 Fee Transparency, CRM2 & Total Cost Reporting, and MWRR vs. TWRR 16.3 The Financial Planning Approach & the Life Cycle 16.4 Behavioral Finance, Sequence-of-Returns Risk & Client Coaching 16.5 Estate Planning Basics

18 Chapter 17: Canadian Taxation

17.1 The Canadian Taxation System 17.2 Taxation of Investment Income 17.3 Capital Gains, Losses & The Superficial Loss Rule 17.4 Registered vs Non-Registered Tax-Advantaged Accounts 17.5 Tax Planning Strategies, Pension Plans & the RDSP

5.6 Stock Indexes & Averages

Key Takeaways Explain This Topic AI

Indexes measure market performance, serve as benchmarks, underlie index funds, ETFs and futures, and are used to calculate beta.

In a price-weighted index such as the Dow Jones Industrial Average, high-priced stocks have the most influence.

The S&P/TSX Composite and S&P 500 are float-adjusted market-capitalization-weighted, so the largest companies have the most influence.

The S&P/TSX 60 tracks 60 large Canadian companies and underlies popular ETFs and the SXF futures contract.

A total return index includes reinvested dividends; a price index does not.

Last updated: October 2026

When people ask how the market did today, they usually mean how an index moved. A stock index tracks the value of a defined group of stocks, and the way it is built determines what it tells you.

What Indexes Are Used For

Market barometer: a quick measure of how the market or a sector performed.

Benchmark: a standard against which to judge a portfolio manager or fund.

Basis for products: index mutual funds, ETFs, futures and options track or are based on indexes.

Risk measurement: a stock's beta is measured against a market index.

Economic indicator: stock indexes are leading indicators of the economy.

How Indexes Are Constructed

Method Each stock's weight depends on Example
Price-weighted Its share price Dow Jones Industrial Average (30 large U.S. stocks)

Market-capitalization-weighted Share price × shares outstanding (often only the freely tradeable "float") S&P/TSX Composite, S&P 500

Equal-weighted All stocks weighted equally, rebalanced periodically Equal-weight versions of major indexes
Worked Example: Same Move, Different Results

An index has three stocks:

Stock Price Shares outstanding Market cap
A $100 10 million $1.0 billion
B $50 40 million $2.0 billion
C $10 100 million $1.0 billion

Case 1: Stock A rises 10% to $110.

Price-weighted average: ( 100 + 50 + 10 ) / 3 = 53.33 (100 + 50 + 10)/3 = 53.33 ( 100 + 50 + 10 ) /3 = 53.33 becomes ( 110 + 50 + 10 ) / 3 = 56.67 (110 + 50 + 10)/3 = 56.67 ( 110 + 50 + 10 ) /3 = 56.67 , a gain of 6.25% .

Market-cap-weighted: total value rises from $4.0 billion to $4.1 billion, a gain of 2.5% .

Case 2: Stock C rises 10% to $11 instead.

Price-weighted: ( 100 + 50 + 11 ) / 3 = 53.67 (100 + 50 + 11)/3 = 53.67 ( 100 + 50 + 11 ) /3 = 53.67 , a gain of only 0.63% .

Market-cap-weighted: total value again rises to $4.1 billion, a gain of 2.5% .

In a price-weighted index, the high-priced stock dominates even though it is not the largest company. In a cap-weighted index, a 10% move in two companies of equal size has the same effect regardless of share price. A stock split changes a price-weighted index's arithmetic, so its divisor must be adjusted; a cap-weighted index is unaffected by splits.

Index Maintenance and the Divisor

Index providers maintain their indexes so they continue to measure the market fairly:

Divisor adjustments: when a company in a price-weighted average splits its stock, the divisor is lowered so the split does not change the average's value. Cap-weighted indexes adjust their divisors for share issues, buybacks and changes in constituents.

Additions and deletions: S&P Dow Jones Indices reviews the S&P/TSX indexes regularly, adding companies that meet its size and liquidity rules and removing those that no longer qualify.

Float adjustment: shares held by control blocks, governments or strategic owners are excluded, so a company's weight reflects only the shares available to investors.

Index changes can move prices. When a stock is added to a major index, the index funds and ETFs that track it must buy, which often increases demand for the shares around the effective date.

Biases to Keep in Mind

A cap-weighted index automatically gives larger weights to stocks that have risen, so it can become concentrated in a few large companies or one sector. Equal-weighted indexes avoid that concentration but tilt toward smaller companies and need frequent rebalancing, which raises trading costs for the funds that track them.

Price Index vs. Total Return Index

A price index reflects only price changes. A total return index assumes dividends are reinvested. Over long periods the difference is large, especially in a dividend-rich market such as Canada, so benchmarks for funds should be total return indexes. Structured products that pay the price return of an index exclude dividends.

Canadian Indexes

Index What it tracks

S&P/TSX Composite Index The main Canadian benchmark: roughly 220 to 230 of the largest TSX companies, float-adjusted cap-weighted. Heavy in financials, energy and materials.

S&P/TSX 60 Index 60 large, liquid companies across sectors; basis for widely held ETFs and the SXF index futures on the Montréal Exchange

S&P/TSX Completion and SmallCap indexes Companies outside the 60, and smaller companies

S&P/TSX Capped indexes Versions that limit any one company's weight (for example, to 10%) to meet fund diversification rules

S&P/TSX Venture Composite Index Companies on the TSX Venture Exchange
U.S. and Global Indexes

Dow Jones Industrial Average: 30 large U.S. companies, price-weighted, the oldest widely quoted average.

S&P 500: 500 large U.S. companies, float-adjusted cap-weighted, the main U.S. benchmark.

Nasdaq Composite: all common stocks listed on Nasdaq, technology-heavy.

MSCI EAFE and MSCI World: developed markets outside North America, and developed markets worldwide.

Because the S&P/TSX Composite is concentrated in a few sectors and the S&P 500 is heavy in technology, a Canadian investor who holds only the domestic index takes significant sector risk. Global indexes show how much diversification foreign markets can add.