Market-cap weighted index

A market-cap weighted index gives each company influence over the index in proportion to its market capitalization, so a company worth twice as much as another has roughly twice the impact on how the index moves. This is the most common weighting scheme used by major indexes, including the S&P 500 and the Nasdaq Composite.

Because larger companies dominate the calculation, a market-cap weighted index can become concentrated in a small number of mega-cap stocks over time, especially when those companies grow much faster than the rest of the index. An investor holding an index fund built this way may end up with far more exposure to a handful of giant companies than they realize, even though the fund technically holds hundreds of stocks.

This differs from an equal-weighted index, where every company counts the same regardless of size, and a price-weighted index, where a company's stock price rather than its actual size determines its influence.