Price-Weighted Index vs Market Capitalization
DEFINITION of ‘Price-Weighted Index’
A stock index in which each stock influences the index in proportion to its price per share. The value of the index is generated by adding the prices of each of the stocks in the index and dividing them by the total number of stocks. Stocks with a higher price will be given more weight and, therefore, will have a greater influence over the performance of the index.
INVESTOPEDIA EXPLAINS ‘Price-Weighted Index’
For example, assume that an index contains only two stocks, one priced at $1 and one priced at $10. The $10 stock is weighted nine times higher than the $1 stock. Overall, this means that this index is composed of 90% of the $10 stocks and 10% of $1 stock.
In this case, a change in the value of the $1 stock will not affect the index’s value by a large amount, because it makes up such a small percentage of the index.
A popular price-weighted stock market index is the Dow Jones Industrial Average. It includes a price-weighted average of 30 actively traded blue chip stocks.
DEFINITION of ‘Market Capitalization’
The total dollar market value of all of a company’s outstanding shares. Market capitalization is calculated by multiplying a company’s shares outstanding by the current market price of one share. The investment community uses this figure to determine a company’s size, as opposed to sales or total asset figures.
Frequently referred to as “market cap.”
INVESTOPEDIA EXPLAINS ‘Market Capitalization’
If a company has 35 million shares outstanding, each with a market value of $100, the company’s market capitalization is $3.5 billion (35,000,000 x $100 per share).
Company size is a basic determinant of asset allocation and risk-return parameters for stocks and stock mutual funds. The term should not be confused with a company’s “capitalization,” which is a financial statement term that refers to the sum of a company’s shareholders’ equity plus long-term debt.
The stocks of large, medium and small companies are referred to as large-cap, mid-cap, and small-cap, respectively. Investment professionals differ on their exact definitions, but the current approximate categories of market capitalization are: