Capitalization-weighted index
   HOME

TheInfoList



A capitalization-weighted (or cap-weighted) index, also called a market-value-weighted index is a
stock market index In finance, a stock index, or stock market index, is an Index (economics), index that measures a stock market, or a subset of the stock market, that helps investors compare current stock price levels with past prices to calculate market performan ...
whose components are
weighted A weight function is a mathematical device used when performing a sum, integral, or average to give some elements more "weight" or influence on the result than other elements in the same set. The result of this application of a weight function is a ...

weighted
according to the total
market value Market value or OMV (Open Market Valuation) is the price A price is the (usually not negative) quantity Quantity is a property that can exist as a multitude or magnitude, which illustrate discontinuity and continuity. Quantities ca ...
of their
outstanding shares Shares outstanding are all the shares of a corporation that have been authorized, issued and purchased by investors and are held by them. They are distinguished from treasury shares, which are shares held by the corporation itself, thus represent ...
. Every day an individual stock's price changes and thereby changes a stock index's value. The impact that individual stock's price change has on the index is proportional to the company's overall market value (the share price multiplied by the number of outstanding shares), in a capitalization-weighted index. In other types of indices, different ratios are used. For example, the AMEX Composite Index (XAX) had more than 800 component stocks. The weighting of each stock constantly shifted with changes in the stock's price and the number of shares outstanding. The index fluctuates in line with the price move of the stocks. Stock market indices are a type of economic index.


Free-float weighting

A common version of capitalization weighting is the ''free-float'' weighting. With this method a ''float factor'' is assigned to each stock to account for the proportion of outstanding shares that are held by the general public, as opposed to "closely held" shares owned by the government, royalty, or company insiders (see
float Float may refer to: Arts and entertainment Music Albums * ''Float'' (Aesop Rock album), 2000 * ''Float'' (Flogging Molly album), 2008 * ''Float'' (Styles P album), 2013 Songs * "Float", by Bush from '' Golden State'', 2001 * "Float," by Eden ...
). For example, if for some stock 15% of shares are closely held, and the other 85% are publicly held, the float factor will be 0.85, by which the company's market capitalization will be multiplied before weighting its value against the rest of the index. In other words, the number of shares used for calculation is the number of shares "floating", rather than outstanding. An index that is weighted in this manner is said to be "float-adjusted" or "float-weighted", in addition to being cap-weighted. For example, the
S&P 500 index The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. As of December ...

S&P 500 index
is both cap-weighted and float-adjusted. Market Cap calculations via Wikinvest Historically, in the United States, capitalization-weighted indices tended to use full weighting, i.e., all outstanding shares were included, while float-weighted indexing has been the norm in other countries, perhaps because of large cross-holdings or government ownership. More recently, many of the U.S. indices, such as the S&P 500, have been changed to a
float Float may refer to: Arts and entertainment Music Albums * ''Float'' (Aesop Rock album), 2000 * ''Float'' (Flogging Molly album), 2008 * ''Float'' (Styles P album), 2013 Songs * "Float", by Bush from '' Golden State'', 2001 * "Float," by Eden ...
-adjusted weighting which makes their calculation more consistent with non-U.S. indices.


Other types of indices

An index may also be classified according to the method used to determine its price. In a
price-weighted index A price-weighted index is a stock market index 300px, A comparison of three major U.S. stock indices: the NASDAQ Composite, Dow Jones Industrial Average, and S&P 500 Index. All three have the same height at March 2007. The NASDAQ spiked during the ...
such as the
Dow Jones Industrial Average The Dow Jones Industrial Average (DJIA), Dow Jones, or simply the Dow (), is a price-weighted measurement stock market index In finance, a stock index, or stock market index, is an Index (economics), index that measures a stock market, or a ...

Dow Jones Industrial Average
, the price of each component stock is the only consideration when determining the value of the index. Thus, price movement of even a single security will heavily influence the value of the index even though the dollar shift is less significant in a relatively high-value name. In a fundamentally weighted index, stocks are weighted by fundamental factors like sales or book value.


Notable capitalization-weighted indices

*
CAC 40 The CAC 40 (french: CAC quarante ) (''Cotation Assistée en Continu'') is a benchmark French stock market index. The index represents a capitalization-weighted measure of the 40 most significant stocks among the 100 largest market capitalization, ...

CAC 40
*
CNX Nifty The NIFTY 50 is a benchmark Indian stock market index 300px, A comparison of three major U.S. stock indices: the NASDAQ Composite, Dow Jones Industrial Average, and S&P 500 Index. All three have the same height at March 2007. The NASDAQ spiked ...
* DAX * EURO STOXX 50 * FTSE 100 Index * FTSE techMARK 100 * Hang Seng Index * IBEX 35 * Indice de Precios y Cotizaciones (IPC) * KOSPI * KOSDAQ * KSE 100 Index * Kuala Lumpur Composite Index (KLCI) * MSCI EAFE * NASDAQ-100 * NASDAQ Composite * NYSE Composite * RTS Index * Russell 2000 * SENSEX * S&P 500 * S&P/ASX 200 * Standard & Poor's 100 Index (OEX) * Taiwan Capitalization Weighted Stock Index * TOPIX * VN-Index


See also

* Stock market index * Index (economics) * Index fund * Index investing * List of stock market indices * Fundamental weighting


References

{{Reflist Business terms Stock market indices