Here’s a puzzle. On a given day, a company with a $100 share price can move the Dow Jones Industrial Average more than a company ten times its size. Meanwhile, in the S&P 500, that bigger company would dominate. Both are “stock market indices”, but they add up their members in completely different ways.
The method an index uses to combine its stocks is called weighting, and it explains a lot about why indices behave the way they do.
Price-weighted: the Dow’s old-school approach
A price-weighted index adds up the share prices of its members and divides by a number called the divisor (adjusted over time for stock splits and changes in membership). The stock with the highest share price has the biggest influence — regardless of how big the company is.
The Dow Jones Industrial Average, with 30 companies, is the best-known example. It dates back to 1896, when adding up prices by hand was the practical option. Today it’s mostly kept for continuity. A stock split illustrates the oddity: when a Dow company splits its shares 2-for-1, its share price halves and so does its weight in the index, even though nothing about the business changed.
Market-cap weighted: size decides
In a market-capitalisation weighted index, each company counts in proportion to its total market value (share price × shares outstanding). Most major indices use a “float-adjusted” version, counting only the shares that are actually available to trade.
The S&P 500, the Nasdaq-100, the FTSE 100 and most broad global indices work this way. The upside: the index reflects how money is actually distributed across the market, and an index fund rarely needs to trade, because weights adjust automatically as prices move. The downside: the biggest companies can make up a very large slice of the index. When a few giants dominate, a “diversified” fund can be more concentrated than it looks.
Capping the giants
To limit that concentration, some indices cap individual weights. The Nasdaq-100 uses a modified market-cap method that trims the largest members when they get too heavy. Sector indices often cap single stocks too.
Equal-weighted: everyone gets the same slice
An equal-weight index gives every member the same weight, say 0.2% each for 500 stocks. Smaller companies get more influence than in the cap-weighted version, and no single giant can dominate. The price is regular rebalancing (usually quarterly), which means more trading and higher costs for funds that track it.
Three methods compared
| Method | Biggest influence | Example | Trade-off |
|---|---|---|---|
| Price-weighted | Highest share price | Dow Jones Industrial Average | Weight has little to do with company size |
| Market-cap weighted | Largest companies | S&P 500, FTSE 100 | Can become top-heavy |
| Equal-weighted | No one | S&P 500 Equal Weight | More rebalancing, higher costs |
Why it matters to you
If you trade index CFDs or futures, weighting tells you which handful of stocks to watch on earnings days. If you invest in index funds, it tells you what you really own. Comparing two funds that both claim to track “US large caps” without checking the weighting is a bit like comparing two pairs of shoes by colour only. Our comparison of the S&P 500 and Nasdaq-100 shows how much these choices change the result.
Commodity indices face the same question in a different form — whether to weight by production, trading volume or a fixed basket — which is part of why oil often dominates broad commodity benchmarks.
Before you buy an index, ask who gets the biggest vote inside it.
Browse more in the indices section.
