Market-Cap Weighting
Market-cap weighting is an index method in which each stock's weight is proportional to its market capitalization, so larger companies count more.
In a market-cap-weighted index, the influence of each company depends on its size. A company worth $500 billion has ten times the weight of a company worth $50 billion. Most major indices, including the S&P 500, the Nasdaq-100, the DAX and the Euro Stoxx 50, use this approach, often based on float-adjusted market cap so that only shares available for public trading are counted.
The method reflects how the market as a whole values companies, and index funds following it need relatively little trading, because weights adjust automatically as prices move. It also keeps the index focused on companies that investors can easily buy.
The main criticism is concentration. When a few very large companies grow quickly, they can make up a large share of the index, and the index becomes more dependent on them. It also means investors automatically hold more of stocks that have risen in price. Some indices cap the weight of any single member to limit this effect.
Example: an index has three stocks worth $60 billion, $30 billion and $10 billion. Their weights are 60%, 30% and 10%. A 10% rise in the largest stock lifts the index by about 6%.