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Share Weighted/Cap Weighted

Indices are generally calculated using one of two different methods, either a “share weighted” method or a “cap weighted” method.

Under a share weighted method (sometimes referred to as a price-weighted method), the index is calculated using a single share of each constituent, or stock, included in the index.  The Dow Jones Industrial Average is an example of an index that uses this method.

The “cap weighted” method is calculated by weighting each constituent by the market capitalization of the firm, so larger constituents will usually be given more weight than they would have under a share weighted method.

The cap weighted method would be more consistent with making a proportional investment in the “market” that the index represents, as the aggregate value of the market is equal to the sum of the market capitalization of each constituent.

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Glossary

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