Two indices can hold the same companies and still move differently, because of the weighting rule. A price-weighted index gives more influence to companies with higher share prices; a cap-weighted index gives it to companies with larger total market value.
The rule decides who actually drives the number, and that changes how you read any headline about the index.
In a price-weighted index, a company's influence is proportional to its share price, regardless of its size. In a cap-weighted index, influence is proportional to total market value, so the largest companies dominate. The same list of companies can produce very different index behavior under the two rules.
How Price-Weighting Works
In a price-weighted index, each company's influence is tied to its share price. A company trading at a high price per share carries more weight than a low-priced company, even if the low-priced one is much larger in total market value.
The practical effect is that the index can be driven by an expensive smaller company more than by a cheaper giant, which is a property of the weighting rule, not of the companies themselves.
How Cap-Weighting Works
In a cap-weighted index, each company's influence is proportional to its total market value. The largest companies can account for a large share of the index's movement, even when they are a small fraction of the total number of holdings.
Because cap-weighting is the most common method for major indices, concentration in a few giants is a normal property of the number, not an anomaly.
| Dimension | Price-weighted | Market-cap-weighted |
|---|---|---|
| Influence based on | Share price | Total market value |
| Who dominates | High-priced companies | Largest companies |
| Size matters? | Only through the price | Directly |
| Typical major example | Some older indices | Most global indices |
The Same List, Different Behavior
The same basket of companies can produce very different index numbers under the two rules, because each hands influence to different members. An equal-weighted version would hand it out evenly.
This is why checking which companies an index holds is only half the picture. The weighting method decides how much each holding actually moves the number.
| Stock | Share price | Shares outstanding | Market cap | Weight (price-weighted) | Weight (cap-weighted) |
|---|---|---|---|---|---|
| Stock A | $200 | 100 million | $20 billion | 74.1% | 15.4% |
| Stock B | $50 | 2 billion | $100 billion | 18.5% | 76.9% |
| Stock C | $20 | 500 million | $10 billion | 7.4% | 7.7% |
The same 3 stocks: in the price-weighted index, Stock A — the highest share price — carries the most weight. In the cap-weighted index, Stock B — the largest market cap — carries the most weight instead. The two rules crown two different companies.
Stock A has the highest share price but the smallest market cap, so it carries a dominant 74.1% weight under price-weighting. Stock B has the lowest share price but the largest market cap, so its weight jumps to 76.9% under cap-weighting. Same three companies, same day's numbers — switch the weighting rule and the index is driven by an almost entirely different company.
Before reading a headline about an index move, ask which method is in play. The same companies can give completely different answers under cap-weighting, price-weighting, or equal-weighting.
Why It Matters for ETFs
An ETF tracking an index inherits the index's weighting method. Two ETFs holding the same companies but weighted differently can show meaningfully different returns over time.
The weighting method also tells you how concentrated the product is: a cap-weighted fund is exposed to its largest names far more than an equal-weighted one, which is a risk property worth knowing before buying.
Frequently Asked Questions
Which method is more common?
Market-cap weighting is the most common for major global indices. Price weighting appears in some older or smaller indices.
Is a cap-weighted index automatically better?
No. It concentrates exposure in the largest companies. That is a property to understand, not a quality judgment.
How do I know an index's method?
Read the index methodology document. It states how constituents are selected, weighted, and rebalanced.
