Stocks · Intermediate · 5 min

Weighting: market cap, price, equal weight

You can explain market-cap, price and equal weighting, calculate the weights in a small example, and say what each method means for concentration.

Who moves the index?

Imagine one company in an index rises 10% and nothing else moves. How much does the index rise? The honest answer: it depends. In one index it might be almost 6%, in another 1%.

The difference is the weighting, the rule that decides how much each company counts. It is invisible in the index level, but it shapes everything the index shows. This lesson compares the three main methods with one small example.

Size, price or equal

Take three fictional companies: Alpha with 10 million shares at 300, Beta with 100 million shares at 50, and Gamma with 4 million shares at 150.

Market-cap weighting. With market-cap weighting, each company counts in proportion to its market value. Most major indices, including the S&P 500, the DAX and the MSCI World, use this method, usually on free-float market value.

Beta, with the lowest share price, dominates with 58%, because it is the largest company.

Price weighting. With price weighting, each company counts in proportion to its share price. The Dow Jones Industrial Average works this way: it adds up the prices of its 30 stocks and divides the total by a divisor, which is adjusted for events such as splits.

Now Alpha dominates with 60%, simply because its share costs the most. Beta, the largest company, counts only 10%.

Equal weighting. With equal weighting, every company counts the same. The S&P 500 Equal Weight Index holds the same companies as the S&P 500, each set to about 0.2% at every quarterly rebalance. Between rebalances, the weights drift with prices.

Each method has a consequence. Market-cap weighting follows the market as it is, but a few giants can dominate. Price weighting depends on share prices that say little about company size. Equal weighting spreads the index evenly, which gives smaller companies more influence and needs regular trading to keep it that way.

5.8% · 1% · 3.3%

Beta's share price rises 10%. Alpha and Gamma do not move.

Market-cap index: Beta weighs 58.1%, so the index rises about 5.8%.
Price-weighted index: Beta weighs 10%, so the index rises 1%.
Equal-weight index: Beta weighs one third, so the index rises about 3.3%.

The same event gives three very different index moves. If Alpha had risen 10% instead, the price-weighted index would have gained 6%, and the market-cap index only about 3.5%. Now imagine Alpha splits its shares two for one, so the price halves. Its market value stays the same, but in a price-weighted index its weight would halve too. The Dow adjusts its divisor after a split so that the index level does not jump, yet the company's weight in the index still falls.

Common mistakes

Assuming an index is evenly spread. In market-cap indices, a few companies can carry a large share.
Reading the Dow as a measure of company size. A high-priced share counts more, whatever the company's value.
Ignoring rebalancing. Equal-weight indices trade regularly to reset weights, which funds tracking them must copy.
Comparing indices without checking the method. Different weights produce different results from the same stocks.

The takeaway

How an index weights its members decides who moves it. Market-cap favors giants, price favors high prices, equal weight treats all alike.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the company that dominates the market-cap weighted index.

Tap the chart.

Beta has the largest market value, so it carries 58% of the index, even though its share price is the lowest.
2Which well-known index is price-weighted?

The Dow adds up the prices of its 30 stocks and divides by a divisor. A high-priced share moves it most.
3In the S&P 500 Equal Weight Index, how are weights kept equal?

S&P resets each company to the same weight, about 0.2%, every quarter. Between rebalances, price moves let weights drift.
4Beta rises 10%, the others are flat. How much does the market-cap index rise?

Beta weighs 58.1%, so 10% × 0.581 ≈ 5.8%. In the price-weighted index, the same move adds only 1%.

of 4 correct.