Difference between revisions of "Capitalization weighted"

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The [[Dow Jones Industrial Average]] is an example of a price-weighted stock market index.
The [[Dow Jones Industrial Average]] is an example of a price-weighted stock market index.
[[Category:Definitions]]

Revision as of 00:19, 20 February 2008

Template:Infobox Midpage Need Sponsor Right A capitalization-weighted index (also called market-value weighted) is one in which each stock affects the index in proportion to its market value. Examples include Nasdaq Composite Index, S&P 500, Wilshire 5000 Equity Index, Hang Seng Index, and EAFE Index.

In contrast, a price-weighted index is one in which stocks are included based on the equity market values of the underlying companies, e.g., the quoted stock price multiplied by the number of stocks outstanding. Many believe a price weighted index will not accurately reflect the evolvement in underlying market values because a change in the price quote of a small company will drive the price weighted index (as it makes up a large part of the index) while the combined market values will remain relatively unaffected without changes in the price quote of the large company.

The Dow Jones Industrial Average is an example of a price-weighted stock market index.