Weighted Stock Index

Weighted Stock Index

An index that tracks a number of stocks in which price changes in some stocks affect the index's price changes more than others. For example, suppose an index tracks three stocks: A, B, and C. If A is weighted more highly than B and C, an uptick in A will be more likely to result in an uptick in the index as a whole (depending on how much more weighted it is). It is common for weighted stock indices to be weighted for market capitalization, meaning the stocks with more capitalization affect the index more. The S&P 500 is a well-known weighted stock index. See also: Unweighted stock index.

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Weighted stock index. In weighted stock indexes, price changes in some stocks have a much greater impact than price changes in others in computing the direction of the overall index.

For example, in a market capitalization weighted index, such as the benchmark Standard & Poor's 500 Index (S&P 500), price changes in securities with the highest market valuations have a greater impact on the Index than price changes in stocks with a lower valuation.

Market capitalization of S&P indexes is calculated by multiplying the current price per share times the number of floating shares. Other market cap weighted indexes multiply the price by the number of outstanding shares. Market cap indexes may also be called market value indexes.

In contrast, in an unweighted index, such as the Dow Jones Industrial Average (DJIA), a similar price change in any of the stocks in the index has an equal impact on the changing value of the index.

The theory behind weighting is that price changes in the most widely held securities have a greater impact on the overall economy than price changes in less widely held stocks.

However, some critics argue that strong market performance by the biggest stocks can drive an index up, masking stagnant or even declining prices in large segments of the market, and providing a skewed view of the economy.