Key takeaways
- A market index measures the performance of a basket of securities meant to represent a market, a sector or an economy; you cannot invest in it directly.
- In a market-cap-weighted index, bigger companies count for more; in a price-weighted index such as the Dow, higher-priced shares count for more; in an equal-weighted index, each stock counts the same.
- The S&P 500, maintained by S&P Dow Jones Indices, is weighted by free-float market capitalization, and a committee selects its members.
- The Dow Jones Industrial Average tracks 30 stocks; it adds up their prices and divides by a divisor that is adjusted for splits.
- A headline index level measures price changes; total return figures also count dividends.
"The market was up 1% today" is usually a statement about a stock market index. The SEC's investor bulletin on index funds describes a market index as a measure of the performance of a "basket" of securities, such as stocks or bonds, meant to represent a sector of a stock market or an economy. It also makes a point that is easy to miss: you cannot invest directly in a market index. You can buy a fund that tracks one, which index funds explained covers. This article is about the index itself: what is in the basket, and how much each member counts.
Three ways to weight an index
Two indexes can hold exactly the same stocks and still move differently, because of their weighting method. Wikipedia's example is the S&P 500 and the S&P 500 Equal Weight: same companies, different rules for how much each counts.
| Method | Each stock's weight depends on | Example |
|---|---|---|
| Market-cap weighted | Its total market value (price × shares outstanding) | S&P 500 (float-adjusted) |
| Price weighted | Its share price alone | Dow Jones Industrial Average |
| Equal weighted | Nothing: each of n stocks gets 1/n | S&P 500 Equal Weight |
The SEC's bulletin explains that market indexes often use market capitalization to decide each security's weight, so bigger companies account for a bigger share of the index; market capitalization explained covers the measure. In a price-weighted index, the price per share decides the weight instead.
A worked example with three stocks
Take three companies:
| Stock | Share price | Shares outstanding | Market cap |
|---|---|---|---|
| A | $300 | 1 million | $300 million |
| B | $50 | 20 million | $1,000 million |
| C | $20 | 10 million | $200 million |
Their weights under each method:
| Stock | Price weighted | Cap weighted | Equal weighted |
|---|---|---|---|
| A | 81.1% | 20.0% | 33.3% |
| B | 13.5% | 66.7% | 33.3% |
| C | 5.4% | 13.3% | 33.3% |
Now suppose one stock rises 10% and the others are unchanged:
| Stock that rises 10% | Price-weighted index | Cap-weighted index | Equal-weighted index |
|---|---|---|---|
| A, the high-priced small company | +8.11% | +2.00% | +3.33% |
| B, the large company | +1.35% | +6.67% | +3.33% |
The same day in the market produces three different headlines. In the price-weighted index, the high-priced but smallest company dominates. Wikipedia notes that equal weighting produces the least concentrated portfolios, but tends to tilt towards smaller companies, which usually means higher volatility than cap weighting.
The S&P 500
According to Wikipedia, the S&P 500 is maintained by S&P Dow Jones Indices, and its members are chosen by a committee using published criteria, not purely by a formula. It took its current 500-company form on 4 March 1957 and has used public float-adjusted market-cap weighting since 2005, meaning only shares available to the public count. Despite the name, Wikipedia lists 503 constituents as of 2026. Under cap weighting, a move in one of its largest members shifts the index far more than the same percentage move in one of its smallest, exactly as stock B did in the example above.
The Dow Jones Industrial Average
The Dow is older and much smaller. Wikipedia records that it debuted on 26 May 1896 with 12 industrial stocks; today it tracks 30. It is price-weighted: its value is the sum of its members' share prices divided by a factor, the Dow divisor, which was about 0.168 as of July 2026. The divisor is changed whenever a member splits its stock, so a split alone does not move the index; stock splits explained shows why a split leaves a company's value unchanged.
The divisor explains the Dow's big point moves. Wikipedia gives the divisor in effect since 29 June 2026 as 0.16824816528350, so a $1 change in any one member's share price moves the index by 1 ÷ 0.168248 ≈ 5.94 points, whatever the company's size.
Price return and total return
Wikipedia's S&P 500 article tabulates its annual returns two ways: price return, which excludes dividends, and total return, which includes them. A headline index level reflects price changes, so comparing your own results, including dividends, with a price-return index understates the index. How dividends work covers the dividend side.
Why indexes matter
Indexes are the yardsticks for funds and for the market as a whole. The SEC's alert on social media fraud suggests comparing any promised investment return with the returns of well-known stock indexes, and the S&P 500 also sets the thresholds for the market-wide circuit breakers. How the stock market works explains the trading behind each index's moves.
Learn to Trade Stocks Beginner, one of our education apps, uses virtual money to practise trading individual stocks. The investing basics hub lists related guides.
Good to know
Frequently asked questions
What is a stock market index?
What is the difference between the Dow and the S&P 500?
Why is the Dow price-weighted?
Does an index include dividends?
Sources
- Investor Bulletin: Index Funds (opens in a new tab)Investor.gov, U.S. Securities and Exchange Commission — accessed
- Stock market index (opens in a new tab)Wikipedia — accessed
- S&P 500 (opens in a new tab)Wikipedia — accessed
- Dow Jones Industrial Average (opens in a new tab)Wikipedia — accessed
- Updated Investor Alert: Social Media and Investing – Avoiding Fraud (opens in a new tab)Investor.gov, U.S. Securities and Exchange Commission — accessed
About the author
Reign Creative LLC — The independent app studio that builds the apps covered on this site and publishes every article here. On Google Play it publishes as Reign Collective Apps.
We use AI tools to help research, draft and edit our articles. Each article lists the sources its factual claims rely on, and details about our apps come from their live Google Play listings. No article on this site has been reviewed by an independent expert unless the reviewer is named on it.
No person at Reign Creative LLC has read this article in full. It was published after automated checks and an AI editorial review, which are described in our editorial policy and are not the same as a person reading every sentence.
Spotted an error? Tell us — how corrections are handled is set out in our editorial policy.