Capitalization-Weighted Index

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Capitalization-Weighted Index

A stock index which is computed by adding the capitalization (float times price) of each individual stock in the index, and then dividing by the divisor. The stocks with the largest market values have the heaviest weighting in the index. See also Float, Divisor.

Capitalization-Weighted Index

An index in which the price is determined by the price of individual stocks, weighted for total market value. For example, if the price of a component stock of the index changes, its effect on the index as a whole is proportionate to share's price multiplied by the number of shares the company has outstanding. This means that changes in price will affect the index more if the component company has greater value. Most non-American market value-weighted indices give further weighting (called float-weighted indexing) to properly account for partial government ownership of many large corporations. This method of index weighting contrasts with a price-weighted index, in which all price changes are weighted differently, and a market share-weighted index, which weights only by the number of shares outstanding and not by their value. Major examples of a market value-weighted index include the NASDAQ Composite Index and the Standard & Poor's 500. The latter uses float-weighted indexing to match its calculations more closely with foreign counterparts.
References in periodicals archive ?
Diamond Hill notes that traditional market capitalization-weighted indexes are based on current market price and can overweight overvalued securities and underweight those that may be undervalued.
All these indexes are float market capitalization-weighted indexes and are quoted in U.
The two are the TOPIX 1000 and the Tokyo Stock Exchange Mothers Index, both of which are market capitalization-weighted indexes, the TSE said.
In contrast to capitalization-weighted indexes, the WisdomTree Indexes anchor the initial weights of individual stocks to a measure of fundamental value.
This new approach may allow the ING WisdomTree Global High-Yielding Equity Index Portfolio to better help protect ING annuity investors from the volatility of traditional market capitalization-weighted indexes that at times are susceptible to stock price fluctuations influenced by speculation, rumor, and large-scale buying and selling activity.
In addition to offering investors exposure to a traditionally difficult to access market, EPI will do so through a fundamentally weighted indexing strategy that seeks to reduce the potential risks that WisdomTree believes are associated with investing in Emerging Markets through market capitalization-weighted indexes.
By weighting constituents using fundamental factors (sales, cash flow, book value and dividends) rather than market capitalization, the FTSE RAFI Index Series can demonstrate outperformance of capitalization-weighted indexes by up to 2.