12 – L1 10 Market Cap Weighting V2

We can also take a weighted average of the stocks in a way that does not treat all the stocks the same. A sensible choice for weights is to give more weight to stocks of bigger companies rather than smaller companies because a larger company’s price moving has a greater effect on the overall change in the stock market. This is called market cap weighting. Remember, that market capitalization of a company is the number of shares times the market price per share. So, for example, the Wilshire 5000 Index is market cap weighted and contains both Nvidia and iRobot. Nvidia has a market cap of about 160 billion. While, iRobot has a market cap of about 1.8 billion. This means that a one percent change in the price of Nvidia will affect the Wilshire 5000 Index more than a one percent change in the price of iRobot. Major indices that are market-capitalization weighted are the S&P 500, Ibovespa, MERVAL, Hang Seng, FTSE and EURO STOXX.

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