What is 'Weighted'

Weighted is a description of adjustments to a figure to reflect different proportions or "weights" of components that make up that figure. A weighted average, for example, takes into account the proportional relevance of each component instead of measuring each individual component equally. The Dow Jones Industrial Average (DJIA) is a price-weighted average that compares each security based on the stock's price relative to the sum of all the stocks' prices. The S&P 500 Index and Nasdaq Composite Index, on the other hand, are based on market capitalization, where each company is measured relative to its market value.

Where the DJIA and Nasdaq indexes utilize weighting in their calculation to more closely approximate the effect that changing stock prices will have on the overall market, weighting can also be used to help evaluate the past and current prices of individual instruments through technical analysis.

BREAKING DOWN 'Weighted'

Emphasis can be placed on the more pertinent data through weighting; this method is used frequently in the investing and accounting world. A weighted moving average, for example, places additional emphasis on the most recent data, thereby providing a better view of current market activity. Similarly, a weighted alpha measures how much a stock has risen or fallen over a certain period, placing more emphasis on recent activity. Since more focus is placed on the current period, the calculation provides a more relevant measure for short-term analysis. Other weighted metrics include weighted average cost of capital (WACC), weighted average coupon, and time weighted average annual rate of return.

Paying Attention to Index Weights

Passive investing, or index investing, has many cheerleaders. Investing in an index is held out as the "best" way to participate in the stock market. For many investors who do not have the time, aptitude or inclination to follow the stock market, this may be true. For others, though, who care about balance in an index, periodic checks of sector weightings are useful. The S&P 500 Index, the most common market index upon which several passive investment vehicles are formed, can become overweighted in certain sectors such as information technology if the market caps of these constituents grow disproportionately relative to the other sectors. If an investor is uncomfortable with too much weight in a particular sector, an index fund may not be the right choice.

RELATED TERMS
  1. Weighted Average

    Weighted average is an average in which each observation in the ...
  2. Portfolio Weight

    Portfolio weight is the percentage composition of a particular ...
  3. Equal Weight

    Equal weight is a type of classification that gives the same ...
  4. EURO STOXX Sustainability Index

    The EURO STOXX Sustainability Index measures the financial performance ...
  5. Overweight

    Overweight refers to a stock in a fund manager's portfolio that ...
  6. Weighted Average Loan Age - WALA

    The weighted average loan age measures the average age of the ...
Related Articles
  1. Investing

    Choosing The Right ETF Index To Reach Your Goals

    The key to choosing ETFs for your portfolio is understanding how they pick stocks and making sure their investment philosophy matches yours.
  2. Investing

    Investigating the Effectiveness of Equal-Weight ETFs

    Investors should know the ins and outs of equally weighting stocks before considering the related ETFs.
  3. Investing

    An Introduction To Sector ETFs

    Find out how sector ETFs can give your portfolio the punch it needs.
  4. Insights

    The Consumer Price Index

    Find out how this economic measure can help you make key financial decisions.
  5. Investing

    Equal Weight Works Across Market Cap Segments

    Equal-weight mid- and small-cap ETFs can generate stellar returns just like their large-cap brethren.
  6. Investing

    The Old Dow Gets a New Look

    This new ETF brings a fresh perspective to the Dow.
  7. Investing

    VTI: Vanguard Total Stock Market ETF

    Learn how the Vanguard Total Stock Market ETF provides an extremely diversified exposure to the entire universe of US securities with low expenses.
  8. Investing

    The One ETF To Own The Top Internet Company Stocks

    Grab a pie of booming online businesses in one shot! Here is the one ETF that lets you own stock in the top Internet companies.
  9. Investing

    Time to Sell Weight Watchers After 103% Year-to-Date Gain?

    Shares of Weight Watchers surged as a successful turnaround gained momentum. Is there more room to run?
RELATED FAQS
  1. How can I calculate the expected return of my portfolio?

    Understand the components of the equation used to calculate the expected return of an investor's portfolio. Learn why the ... Read Answer >>
  2. How are S&P 500 index components weighted?

    Learn about how components of the S&P 500 are weighted, and how this calculation favors certain stocks in being more representative ... Read Answer >>
  3. What is the weighted average of outstanding shares? How is it calculated?

    The weighted average of outstanding shares is a calculation that incorporates any changes in the amount of outstanding shares ... Read Answer >>
  4. How do you calculate costs of capital when budgeting new projects?

    Discover how a company should estimate its costs of capital when budgeting for a new business project using the weighted ... Read Answer >>
Trading Center