Financial Education

A value weighted security index is calculated by summing the market capitalization of each stock in the index. A derivation of a value weighted index is the float weighted index, which uses only the freely trading shares to calculate market capitalization. Today, most capitalization weighted indexes are actually float-weighted.

A major advantage of value weighted indexes is that they automatically adjust for corporate actions such as stock splits. The decline in value per share following a split is exactly offset by the increase in the total shares outstanding. Stocks with higher market capitalization receive relatively more weight in the index.

For more information, see all articles on: Investing in Stocks, Investment Returns, Passive Management, Performance Measurement

See also:

Price Weighted Index

Unweighted Securities Indexes

Benchmarks for Investments in Real Estate

Index Weighting Methods

Dow Jones Industrial Average