Definition of 'Capitalization-Weighted Index'
A type of market index whose individual components are weighted according to their market capitalization, so that larger components carry a larger percentage weighting. The value of a capitalization-weighted index can be computed by adding up the collective market capitalizations of its members and dividing it by the number of securities in the index.
Also known as a "market-value weighted index".
Investopedia explains 'Capitalization-Weighted Index'
Most of the broadly-used market indexes today are "cap-weighted" indexes, such as the S&P 500, Nasdaq, Wilshire, Hang-Seng and EAFE indexes. In a cap-weighted index, large price moves in the largest components can have a dramatic effect on the value of the index. Some investors feel that this overweighting toward the larger companies gives a distorted view of the market, but the fact that the largest companies also have the largest shareholder bases makes the case for having the higher relevancy in the index.