Weighted stock index
Weighted Stock Index
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.