What Is the Value Line Composite Index?
Let me explain the Value Line Composite Index directly to you—it's a stock index that includes about 1,700 companies from the NYSE, American Stock Exchange, Nasdaq, Toronto, and over-the-counter markets. This index comes in two forms: the original Value Line Geometric Composite Index, which is equally weighted, and the Value Line Arithmetic Composite Index, designed to reflect changes as if you held equal amounts of each stock in a portfolio. You'll find these indexes published in the Value Line Investment Survey, which was created by Arnold Bernhard, the founder and CEO of Value Line Inc.
Understanding the Value Line Composite Index
The name 'Value Line' comes from a multiple of cash flow that Bernhard would overlay on price charts to normalize company values—something you should know if you're diving into investment research. Value Line stands as one of the most respected firms in this field, with a strong performance record where its model portfolios have typically outperformed the market over the long term. The index itself draws from the same companies as the Value Line Investment Survey, but it excludes closed-end funds.
You need to understand that the number of companies in the index can change due to additions or delistings on exchanges, mergers, acquisitions, bankruptcies, and decisions by Value Line on coverage. These choices aim to maintain a broad representation of the North American equity market. Keep in mind that shifts like a company moving exchanges or being delisted don't affect the index's methodology, whether we're talking geometric or arithmetic calculations. The original Geometric Composite Index launched in 1961, marking a key point in its history.
The Value Line Geometric Composite Index
This is the original version I want to detail for you, introduced on June 30, 1961. It's an equally weighted index that relies on a geometric average. To calculate the daily price change, you multiply the ratio of each stock's closing price to its previous closing price, then raise that product to the reciprocal of the total number of stocks.
The Value Line Arithmetic Composite Index
Established on February 1, 1988, this version uses an arithmetic mean to better approximate what would happen if you held a portfolio with equal amounts of each stock. The daily price change comes from adding up the daily percent changes of all stocks and dividing by the total number of stocks.
Key Takeaways
- The index covers a mix of roughly 1,700 stocks from major North American market indexes.
- It has two forms: the Geometric Composite Index and the Arithmetic Composite Index.
- The Geometric version is equal-weighted, uses a geometric average, and its daily change approximates the median stock price change.
- The Arithmetic version employs an arithmetic mean, with daily changes reflecting a portfolio of stocks in equal amounts.
