Portfolio Effect

Featured term of the day

Definition / Meaning of

Weighted Stock Index

Categories: Finance,

In weighted stock indexes, price changes in some stocks have a much greater impact than price changes in others in computing the direction of the overall index. By contrast, in an unweighted index, prices changes in all the stocks have an equal impact.A price weighted index, such as the dow jones industrial average (DJIA), is affected more by the changing prices of higher-priced securities than by changes in the prices of lower-priced securities. Similarly, a market capitalization weighted index, such as the nasdaq composite index, gives more weight to price changes in securities with the highest market values, calculated by multiplying the current price per share by the number of outstanding or floating shares. A capitalization weighted index may also be called a market value weighted index. The theory behind weighting is that price changes in the largest or most expensive securities have a greater impact on the overall economy than price changes in smaller-cap or less expensive stocks. However, some critics argue that strong market performance by the biggest or most expensive stocks can drive an index up, masking stagnant or even declining prices in large segments of the market, and providing a skewed view of the economy.