Market-Cap-Weighted Index¶
A market-cap-weighted index assigns each constituent a weight proportional to its market capitalization — share price multiplied by free-float shares outstanding. The largest companies therefore drive the majority of index movement. The S&P 500, Nasdaq 100, and Russell 2000 all use this methodology.
HOW IT WORKS¶
Each stock's weight is calculated as its market cap divided by the total index market cap. In practice, most modern indexes use free-float market cap, excluding locked insider and government-held shares from the count. The index level is derived by dividing the total float-adjusted market cap by a divisor — a scaling constant maintained by the index provider that is adjusted for corporate actions such as splits, additions, and deletions, keeping the series continuous without artificial jumps. Because weights drift continuously with prices, the largest stocks compound their influence as they rise and shed it as they fall, embedding momentum by construction. Scheduled rebalances handle changes to share counts and membership, not the daily weight drift.
IN TAPEBOARD¶
Cap-weighting concentration is a core reason to pair index readings with breadth data. A rising S&P 500 headline can mask broad deterioration when only the top few mega-caps are advancing — the live scanner lets you cross-reference index movement against how many stocks are actually participating. When analyzing ETFs, cap-weighted funds carry heavier single-name risk in their largest holdings than equal-weighted alternatives, a distinction visible when comparing position sizes in a screener. Flow traders also use cap-weighting mechanics to anticipate passive fund behavior: as a stock's market cap grows, index-tracking funds must buy more of it mechanically, generating predictable demand that shows up in volume patterns.