Weighted Average Market Capitalization

The weighted average market capitalization (market-cap weighting) is a method for constructing stock market indexes or funds in which each component is weighted according to its total market capitalization (share price × number of outstanding shares). Larger companies therefore comprise a bigger share of the index and have greater influence on its performance.

Key points

• Market capitalization = share price × outstanding shares.
• In a market-cap-weighted index, each company’s weight = its market cap ÷ total market cap of all constituents.
• Larger-cap stocks drive index returns more than smaller-cap stocks.
• Market-cap weighting is the methodology behind many major indexes (for example, the S&P 500).

How it’s calculated

1. Compute each company’s market cap (price × outstanding shares).
2. Add the market caps of all constituents to get the index’s total market cap.
3. Weight for each stock = company market cap ÷ total market cap.

Example: a company with a $1 million market cap in an index whose total market cap is $100 million represents 1% of the index.

Different providers may use slight variations when reporting an average market-cap metric (e.g., arithmetic vs. geometric mean), but index weighting follows the simple proportion above.

Advantages

• Reflects the actual size distribution of the market—larger, more established companies naturally have greater influence.
• Provides automatic, performance-driven rebalancing: companies that grow increase their weight, while shrinking companies fall out of the index.
• Often viewed as relatively stable because more weight is given to large, typically less volatile firms.

Disadvantages

• Concentration risk: a small number of very large firms can dominate returns, reducing effective diversification.
• Underweights small-cap outperformance: if smaller companies outperform, market-cap-weighted investors gain less than if they held an equal-weighted exposure.
• Implicitly assumes markets price securities efficiently; heavy weighting in winners can amplify bubbles.

Alternatives

• Price-weighted indexing: weights based on stock price (e.g., Dow Jones Industrial Average).
• Equal-weighting: each stock carries the same weight (e.g., S&P 500 Equal Weight Index).
• Fundamental or factor weighting: uses fundamentals (sales, earnings) or factor scores (value, momentum) to set weights.

When to use

Market-cap-weighted indexes suit investors who want an index that mirrors the market’s capital structure and that passively follows the market’s largest companies. Consider equal- or factor-weighted alternatives if you want to reduce concentration in megacaps or tilt exposure toward smaller stocks or specific characteristics.

Sources

• S&P Global — S&P 500 and S&P 500 Equal Weight Index materials
• Morningstar — Average market capitalization methodology
• Nasdaq — Discussion of price-weighted vs. cap-weighted index attribution