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What is an index weighting?

Weighting classifications

An index may also be classified in accordance with the method used to determine its price.

In a price-weighted index such as the DJIA, the price of each component stock is the only consideration when determining the value of the index. Thus, price movement of even a single security will heavily influence the value of the index even though the dollar shift is less significant in a relatively highly valued issue, while ignoring the relative size of the company as a whole.

In contrast, a capitalisation-weighted index such as the Hang Seng Index factors in the size of the company. Thus, a relatively small shift in the price of a large company will heavily influence the value of the index.

An equal-weighted index is one in which all components are assigned the same value. For example, the Barron's 400 Index assigns an equal value of 0.25% to each of the 400 stocks included in the index, which together add up to the 100% whole.

 

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