Definition
Index weighting is the rule that sets how much each constituent contributes to an index's return. Common schemes include market-capitalization (often free-float-adjusted) weighting, equal weighting, price weighting and factor- or fundamental-based weighting.
How it works
Under cap weighting, a constituent's weight is its market value, usually adjusted for free float, divided by the total, so large companies drive the result and weights drift automatically with prices. Equal weighting gives each constituent the same weight and needs periodic rebalancing, while price weighting lets higher-priced shares count for more regardless of company size.
The scheme shapes concentration, turnover and what the index rewards: cap-weighted indexes can become dominated by a few large names, equal-weighted indexes tilt toward smaller companies and trade more, and price-weighted indexes depend on arbitrary share-price levels.
Formula / convention
Weight of constituent i = Measure for i ÷ Sum of the measure for all constituents (measure = free-float market cap, price, or 1 for equal weighting)
Illustrative example
Illustration with fictional figures: Stocks A, B and C have free-float market caps of HK$60 billion, HK$30 billion and HK$10 billion, giving cap weights of 60%, 30% and 10%, while equal weighting gives 33.3% each. If only Stock A rises 10%, a cap-weighted index of the three gains 0.60 × 10% = 6.0%, whereas the equal-weighted index gains 10% ÷ 3 ≈ 3.3%.
What to watch for
Weighting rules create hidden bets: a cap-weighted index can be concentrated in a few large companies or sectors, and an equal-weighted index can hold smaller, less liquid stocks and incur higher turnover costs. Check an index's methodology and top weights before treating it as diversified.