Market capitalization-weighted index

Market capitalization-weighted index (also known as a capitalization-weighted index or market-value-weighted index) is a type of stock market index in which the weight assigned to each constituent security is proportional to its market capitalization. Companies with larger market capitalizations have a greater influence on the index's value than companies with smaller market capitalizations. Market capitalization-weighted indices are the most widely used method for constructing equity market benchmarks and are employed by major indices including the S&P 500, the NASDAQ Composite, the NASDAQ-100, the NYSE Composite Index, the FTSE 100 Index, the CAC 40, the DAX, and the MSCI World.

History

Market capitalization weighting became the dominant methodology for equity indices during the twentieth century as financial markets expanded and institutional investing became more widespread. Earlier indices, including the Dow Jones Industrial Average, used price-weighted methodologies that assigned weights according to individual share prices rather than company size.

The development of capitalization-weighted indices reflected the growing importance of representing the aggregate value of listed companies within a market. The introduction of indices such as the S&P 500 helped establish capitalization weighting as the preferred methodology for measuring broad equity market performance and for benchmarking investment portfolios.

Methodology

In a market capitalization-weighted index, each constituent's weight is determined by its market capitalization relative to the combined market capitalization of all companies included in the index.

Market capitalization is generally calculated as:

```text Market Capitalization = Share Price × Number of Outstanding Shares