How to calculate the Value-Weighted Index
About this lesson
In this video, you will learn details about the S&P 500 index, mainly its methodology.
What value-weighted means
In a market-value-weighted (or cap-weighted) index, each company counts in proportion to its market capitalization:
Market capitalization = Share price × Shares outstanding
Bigger companies move the index more. The S&P 500 and the Nasdaq Composite are value-weighted.
The calculation
Index = Total market value of all stocks ÷ Divisor
The index measures the change in the total value of the stocks it holds.
Example
| Stock | Price | Shares | Market value |
|---|---|---|---|
| A | $25 | 20 million | $500 million |
| B | $100 | 1 million | $100 million |
Stock A makes up 500 ÷ 600 = 83% of the index, even though its price is lower. (In a price-weighted index, B would carry more weight.)
If both prices rise 10%, the index rises 10%. If only A rises 10%, the total value rises by $50 million, so the index rises 50 ÷ 600 = 8.3%.
Stock splits don’t matter
A split doubles the shares and halves the price, so the market value stays the same. No adjustment is needed.
How the S&P 500 works
- It covers about 500 large US companies, chosen by a committee using rules on size, liquidity and profitability.
- Weights use float-adjusted market value: only shares available to the public count, not those held by insiders or governments.
- The divisor is adjusted when companies are added or removed, or issue or buy back shares, so those events don’t jump the index.