A capitalization-weighted index can also be referred to as a market-value-weighted index. This is a form of a stock market index whose different elements are weighted according to the total market value of the outstanding shares.
The method for calculating the price-weighted average is to add the stock prices together and then divide this by the number of shares in the average. It’s an intricate and carefully balanced method in that if the [market-cap] rises and the stock price rises it will attain a bigger weighting in the index, however, a decrease in stock price and market cap will mean that the weighting of that specific stock in the index will drop.
Key takeaways:
- A capitalization-weighted index can also be referred to as a market-value-weighted index.
- The method of calculating the price-weighted average is to add the stock prices together and then divide this by the number of shares in the average.
- There are various globally traded weighted indices such as S&P 500, Dow Jones Industrial Average, Nikkei 225, Nasdaq 100, FTSE 100, CAC 40 & Dax 50.