Capitalizationweighted index

A capitalizationweighted index is an index whose components are weighted according to the total market value of their outstanding shares. Also called a marketvalueweighted index. The impact of a component's price change is proportional to the issue's overall market value, which is the share price times the number of shares outstanding.
For example, the AMEX Composite Index (XAX) has more than 800 component stocks. The weighting of each stock constantly shifts with changes in the stock's price and the number of shares outstanding. The index fluctuates in line with the price move of the stocks.^{[1]}
Contents
Mathematical formula
Other types of indices
An index may also be classified according to the method used to determine its price. In a priceweighted index such as the Dow Jones Industrial Average, the price of each component stock is the only consideration when determining the value of the index. Thus, price movement of even a single security will heavily influence the value of the index even though the dollar shift is less significant in a relatively highvalue name. In a marketshare weighted index, price is weighted relative to the number of shares, rather than their total value. In a fundamentally weighted index, stocks are weighted by fundamental factors like sales or book value.
Traditionally, capitalizationweighted indices in the United States tended to have a full weighting, i.e., all outstanding shares were included; overseas, because partial government ownership of large companies was more common, socalled floatweighted indexing has been the norm for many nonU.S. indices. Recently, many of the U.S. indices, such as the S&P 500, have been changed to a floatadjusted weighting which makes their calculation more consistent with nonU.S. indices.
A free float adjustment factor is introduced in calculations for the index. This represents the proportion of shares that is free floated as a percentage of issued shares and then is rounded to the nearest multiple of 5% for calculation purposes. To find the freefloat capitalization of a company, first find its market cap (number of outstanding shares x share price) then multiply its freefloat factor. The freefloat method, therefore, does not include restricted stocks, such as those held by company insiders.^{[2]}
Some capitalizationweighted indices
 NASDAQ Composite
 NASDAQ100
 NYSE Composite
 FTSE100
 Hang Seng Index in Hong Kong
 Russell 2000
 S&P 500  Now floatweighted
 SENSEX in India
 Standard & Poor's 100 Index (OEX)  now float weighted
 IBEX 35 index comprising the 35 most liquid Spanish stocks traded in the continuous market, and is Bolsa de Madrid's benchmark.
 Indice de Precios y Cotizaciones (IPC)  index of 35 of the Bolsa Mexicana de Valores (BMV) most highly marketable issuers with a minimum market value of $100 million; revised every six months.
 Kuala Lumpur Composite Index (KLCI)
 FTSE TechMark
 CAC 40
 VNIndex
 Taiwan Capitalization Weighted Stock Index
Notes
 ^ John Downes & Jordan Elliot Goodman, Finance and Investment Terms, Barrons Financial Guides, 2003
 ^ Market Cap calculations via Wikinvest
See also
 Stock market index
 Index(economics)
 Index fund
 Index investing
 List of stock market indices
 Fundamental weighting
 Capitalization weighted methodology via Wikinvest
Categories: Business terms
 Stock market indices
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