Capitalization weighted

From MarketsWiki
Revision as of 21:16, 18 August 2011 by JohnJLothian (talk | contribs)
(diff) ← Older revision | Latest revision (diff) | Newer revision → (diff)
Jump to navigation Jump to search

Straits Financial-370x90.png

A capitalization-weighted index (also called market-value weighted) is one in which each stock affects the index in proportion to its market value. Examples include Nasdaq Composite Index, S&P 500, Wilshire 5000 Equity Index, Hang Seng Index, and EAFE Index.

In contrast, a price-weighted index is one in which stocks are included based on the equity market values of the underlying companies, e.g., the quoted stock price multiplied by the number of stocks outstanding. Many believe a price-weighted index will not accurately reflect the evolvement in underlying market values because a change in the price quote of a small company will drive the price-weighted index (as it makes up a large part of the index), while the combined market values will remain relatively unaffected without changes in the price quote of the large company.

The Dow Jones Industrial Average is an example of a price-weighted stock market index.