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Market-cap-weighted index definition
A market-cap-weighted index is a stock index in which each company's weight is set by its market value, or market capitalisation, calculated as share price multiplied by shares outstanding. The S&P 500 and the NASDAQ-100 are leading examples.
Each constituent's weight equals its market cap divided by the combined market cap of all members, so the largest companies have the greatest impact on the index level. Many such indices use free-float weighting, counting only the shares available to trade rather than those held tightly by insiders or governments.
Its cousin is the price-weighted index, which ranks influence by share price instead of company value. Under market-cap weighting, a high share price alone means little: what counts is the company's total size, so a large company with a low share price can still dominate.
Market-cap-weighted index Example
Say a market-cap-weighted index holds two companies worth 900 billion and 100 billion, a total of 1 trillion, giving weights of 90% and 10%.
The larger company gains 10%, while the smaller is unchanged. The index rises by about 9%, because the bigger company's weight drives most of the move.
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