Equal Weighting
Equal weighting is an index or portfolio method that gives every stock the same weight, regardless of company size or share price.
In an equal-weighted index, each member stock has the same influence. In an equal-weighted version of the S&P 500, for example, each of the roughly 500 stocks would make up about 0.2% of the index, whether the company is worth $20 billion or many times more.
Equal weighting gives smaller members of the index much more weight than they would have under market-cap weighting. This reduces concentration in the largest companies and tends to tilt the index toward mid-sized firms and, in practice, toward value characteristics.
Because prices constantly change, equal weights drift apart. The index must be rebalanced regularly, often quarterly, by selling stocks that have risen and buying those that have fallen. This creates more trading and potentially higher costs for funds that track the index.
Equal-weighted and cap-weighted versions of the same index can perform quite differently. When a handful of large companies drive the market, the cap-weighted index usually does better. When gains are broad, the equal-weighted version often does better.
Comparing the two is also a common way to judge market breadth, meaning how many stocks are participating in a move.