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Understanding How Global Indices are Weighted

A stock index is a type of index that tracks the performance of stocks. It measures the value of a specific section or industry and is calculated by adding up the prices of all the stocks in that section. Stock indexes are often used to measure the performance of an entire market, such as a country’s economy or an entire continent’s economy. They are also used to measure changes in economic conditions over time. In this write-up, we’ll be sharing two popular techniques through which global indices are weighted. Visit MultiBank Group

Market-Cap Weighting

Market cap or market capitalization is the total value of a company’s outstanding shares owned by stakeholders. Market-cap weighting method values a stock’s market cap to the total market cap of all stocks in a particular index. If the price or the market cap of the stock increases, so does its weighting in the index.

If the opposite happens, the weightage lowers. Some common terms used are large, mid, and small-cap stocks which denote the stock’s weightage in the index. Read More ar

Fundamentally Weighted Index

In this process, the focus or emphasis is on cash flow, dividends, sales, earnings, or book value. The stocks that rank better based on this factor get more weightage in the index. So, the primary focus is how well the stock performs, and the weightage calculation does not seem random or dependent on the size of the company.

However, before investing, you must remember that these factors drive what you are looking for. These two methods are the most common; apart from them, float weighting and revenue weighting methods are also prevalent.

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