Most stock indexes and averages are
weighted,
which means that some stocks in the index have a larger impact
on the calculation than others because they are assigned a greater
value. The logic behind weighting is that the movement of the
stocks of certain companies has a greater impact on the markets
and the overall economy than what happens with others.
There are several ways to weight.
Capitalization-weighted indexes
assign greater value to the stock of companies that have the highest
market capitalization, calculated by multiplying the number of
existing shares by their current market price. The majority of
indexes are capitalization weighted, including the
S&P
500
and the
Wilshire
5000.
Price-weighted indexes give greater
value to changes in the prices of more expensive stocks. For example,
the DJIA is price weighted, as is Japan’s Nikkei 225.
In contrast, equal-weighted indexes and averages
give equal emphasis to the price movements of all the stocks they
measure, so the price change of every company in the index has
the same impact on the changing value of the index. The
Value
Line Composite Index
of about 1,700 stocks is the
primary equal-weighted index. Another is the S&P Equal Weight
Index (S&P EWI), which tracks the same 500 stocks as the
S&P
500,
but gives them equal weight.
