Community Forex Questions
What is market-weighted index?
A market-weighted index, also known as a capitalization-weighted or cap-weighted index, is a type of stock market index where the components are weighted based on their market capitalization. Market capitalization is the total value of a company's outstanding shares of stock and is calculated by multiplying the stock's current market price by the number of outstanding shares.

In a market-weighted index, larger companies with higher market capitalizations have a greater impact on the index's performance compared to smaller companies with lower market capitalizations. This means that the stock prices of larger companies will have a more significant influence on the index's movements.

The calculation of a market-weighted index is relatively straightforward. The weight of each individual stock in the index is determined by dividing its market capitalization by the total market capitalization of all the stocks in the index. This percentage weight is used to determine how much influence each stock has on the index's value. Consequently, as the stock prices of larger companies rise or fall, the index will reflect these changes more prominently.

Popular market-weighted indexes include the S&P 500, which tracks 500 of the largest publicly traded companies in the United States, and the Nasdaq Composite, which focuses on technology and internet-related companies. These indexes provide a broad representation of the overall market and are widely followed by investors and financial professionals as benchmarks for evaluating the performance of various investment portfolios.

Market-weighted indexes offer a realistic snapshot of the market by emphasizing the significance of larger, more established companies. However, they can also be sensitive to the performance of a few major players, making them potentially less diversified than other index types, such as equal-weighted or fundamentally weighted indexes.

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