# Understanding market-cap, equal-cap and fundamental weighting

MARKET CAP WEIGHTED INDEX

How to Calculate

 Market Last Year’s Capitalization Earnings ASSUME THE STOCK MARKET HAS ONLY THREE COMPANIES: Company A = \$6 billion \$100 million Company B = \$3 billion \$300 million Company C = \$1 billion \$200 million Total Market Cap of All Companies \$10 billion Total Earnings of All Companies \$600 million
 MARKET CAP WEIGHTED INDEX Company A = \$6 billion = 60% weight in index \$10 billion Company B = \$3 billion = 30% weight in index \$10 billion Company C = \$1 billion = 10% weight in index \$10 billion
 The market-cap-weighted index, as the name implies, weights companies according to market cap. Here, Company A has a market capitalization of \$6 billion which is equal to 60% of the total market cap of all stocks (\$10 billion).

EQUALLY WEIGHTED INDEX

How to Calculate

 Market Last Year’s Capitalization Earnings ASSUME THE STOCK MARKET HAS ONLY THREE COMPANIES: Company A = \$6 billion \$100 million Company B = \$3 billion \$300 million Company C = \$1 billion \$200 million Total Market Cap of All Companies \$10 billion Total Earnings of All Companies \$600 million
 EQUALLY WEIGHTED INDEX Company A = 33% weight in index Company B = 33% weight in index Company C = 33% weight in index
 The equally weighted index weights all companies equally, regardless of size. Here, there are three companies in the stock universe, and therefore each gets a one- third weight in the index.

FUNDAMENTALLY WEIGHTED INDEX

How to Calculate

 Market Last Year’s Capitalization Earnings ASSUME THE STOCK MARKET HAS ONLY THREE COMPANIES: Company A = \$6 billion \$100 million Company B = \$3 billion \$300 million Company C = \$1 billion \$200 million Total Market Cap of All Companies \$10 billion Total Earnings of All Companies \$600 million
 FUNDAMENTALLY WEIGHTED INDEX Company A = \$100 million = 16.7% weight in index \$600 million Company B = \$300 million = 50% weight in index \$600 million Company C = \$200 million = 33.3% weight in index \$600 million
 For the fundamentally weighted index, we used earnings as a measure of economic size. Earnings for the entire universe of companies equaled \$600 million, so Company B, with \$300 million in earnings, receives a weight of 50% in this fundamentally weighted index. Fundamentally weighted indexes often use additional measures of fundamental size such as cash flow, book value, sales, and/or dividends. Notice that market capitalization (and therefore market price) is not considered for this fundamental index.