Price-weighted and market-cap-weighted indices are two common methods used to measure stock market performance. The main difference between them is how individual companies influence the overall value of an index. Understanding these methods helps investors interpret market movements and compare different stock market benchmarks.

A price-weighted index gives greater importance to companies with higher share prices, regardless of their total market value. In this type of index, stocks with expensive individual shares have a greater influence on index movements than stocks with lower share prices. The Dow Jones Industrial Average (DJIA) is a well-known example of a price-weighted index. For instance, a stock trading at $300 will have a greater impact on the index than a stock trading at $50, even if the second company is much larger in terms of market capitalisation.

In contrast, a market-cap-weighted index assigns importance to companies according to their total market capitalization, which is calculated by multiplying the share price by the number of outstanding shares. Larger companies therefore have a greater influence on the index's overall performance. The S&P 500 is a popular example of this approach, where companies with higher market values contribute more significantly to index movements.

Both methods have advantages and limitations. Price-weighted indices are relatively straightforward but may give disproportionate influence to companies with expensive shares. Market-cap-weighted indices better reflect the combined market value of their constituent companies, although a few large corporations can dominate performance.

For investors, understanding these differences is important when evaluating market trends, comparing benchmarks, and building diversified portfolios. It also helps explain why two major indices can move differently during the same trading session.