Stock indices help traders keep an eye on market trends, but did you know they aren’t all built the same way? Two of the most common methods for calculating an index are price-weighted and market cap-weighted. Knowing how they work can give you an edge when making trading decisions.
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Price-weighted indices: When stock price calls the shots

Think of a potluck dinner where influence is based on the price of what each guest brings. Someone showing up with a $100 bottle of wine has a bigger say than someone bringing a $10 salad-even if the salad feeds more people!

That’s how a price-weighted index works. A company's influence depends on its stock price, not its actual market value. Stocks with higher prices have more weight, even if the company itself isn’t the biggest.
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Real-world examples:

Boeing and the DJIA (2019-2020)

At the start of the Covid-19 pandemic, Boeing had a high stock price, so it had an outsized influence on the Dow Jones Industrial Average (DJIA), even though many other companies were struggling too.
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Apple’s Stock Split (2020)

Apple had a major impact on the DJIA because of its high stock price. But when it split its shares 4-for-1, its price dropped (due to the split, not market conditions), instantly reducing its weight in the index—even though the company’s actual value didn’t change.
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Market cap-weighted indices: The big picture approach

Now, imagine a community meeting where influence isn’t based on income alone, but on total wealth. Those with more wealth have a bigger say in decisions.

That’s how market cap-weighted indices work. A company’s weight in the index depends on its total market value (stock price × number of shares). Companies with larger market caps have more influence on index movements.

Popular indices like the S&P 500 and NASDAQ Composite use this method.
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Real-world examples:

S&P 500 and tech giants

Big players like Apple, Microsoft, and Amazon dominate the S&P 500 because of their massive market caps. After Covid-19, tech stocks surged, pulling the entire index up with them.
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NASDAQ composite and concentration risk

The NASDAQ is packed with tech stocks. Companies like Amazon and Google hold a lot of weight, so if tech is thriving, the NASDAQ soars. But if tech takes a hit, the whole index feels the pain.

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Which one is better? Pros and cons

Index type	Pros	Cons
Price-Weighted	Simple to understand. Reflects high-priced stocks well.	Can be skewed by high stock prices. Doesn’t always reflect a company’s real market size.
Market Cap-Weighted	More accurate representation of market value. Adjusts naturally as companies grow or shrink.	Can be dominated by a few big companies, leading to concentration risk. May underrepresent smaller firms.

Start trading indices today

Now that you know the difference between price-weighted and market cap-weighted indices, you’re ready to make smarter trading choices. Whether you're drawn to one type or want to explore both, Deriv offers a variety of CFDs and options on global indices.

Start risk-free with a demo account or explore free courses on Deriv Academy!

Happy trading!

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Quiz

Which type of index gives more influence to companies with higher market value rather than just higher stock prices?

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Price-weighted index

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Market cap-weighted index

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Neither; all companies have equal weight

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FAQs

Why do price-weighted indices sometimes give misleading signals?

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Because they favor stocks with higher prices, they don’t always reflect actual market size. A single expensive stock can move the index significantly, even if it’s not the largest company overall.

Is a market cap-weighted index always the better choice?

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Not always! While it gives a more accurate picture of the market, it can be heavily influenced by just a few massive companies. If those stocks struggle, the whole index can drop—even if smaller companies are doing well.

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