Weighted Average Market Capitalization

Written By
Paul Tracy
Updated November 4, 2020

What is Weighted Average Market Capitalization?

Weighted Average Market Capitalization refers to a stock market index in which larger companies (i.e. with higher market capitalization) have more influence on the index's performance.

How Does Weighted Average Market Capitalization Work?

Various stock market indices follow selected companies based on their niche (e.g. industrials, technologies, small caps, etc.). These indices track according to the companies in the index. For example, if the stock prices of the companies in the index go up, the index will go up.  Most indices weight the average performance of the companies in their index by the market capitalization of each company. This way, larger companies, usually measured as those with higher market capitalizations (i.e. price per share X outstanding shares), have more influence over the index. The S&P 500, for example, uses a weighted average market capitalization to measure performance.

In contrast, for example, the Dow Jones Industrial Average uses a price-weighted index. That is, irrespective of the size of the company, the share price is used as the weighting the average of all stocks in the index. The higher share prices have more influence over the performance of the index.

Why Does Weighted Average Market Capitalization Matter?

Investors should understand the composition of the stocks in a particular index, especially if it is used to track portfolio performance. Using a market capitalization to weight the stocks in an index, an investor can quickly see which sectors are emphasized by a particular index.

Activate your free account to unlock our most valuable savings and money-making tips
  • 100% FREE
  • Exclusive money-making tips before we post them to the live site
  • Weekly insights and analysis from our financial experts
  • Free Report - 25 Ways to Save Hundreds on Your Monthly Expenses
  • Free Report - Eliminate Credit Card Debt with these 10 Simple Tricks
Ask an Expert
All of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Weighted Average Market Capitalization.
Be the first to ask a question

If you have a question about Weighted Average Market Capitalization, then please ask Paul.

Ask a question

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

If you have a question about Weighted Average Market Capitalization, then please ask Paul.

Ask a question Read more from Paul
Paul Tracy - profile
Ask an Expert about Weighted Average Market Capitalization

By submitting this form you agree with our Privacy Policy

Don't Know a Financial Term?
Search our library of 4,000+ terms