How Indexes Are Built (and Why It Changes What You Own)

Cap-weighted: the giants run the show

The S&P 500 is capitalization-weighted: each stock's weight = its market cap ÷ total. When Apple is ~7% of the index, Apple's 5% move drags the whole index ~0.35% by itself. The top 10 companies now represent roughly a third of the S&P 500 — so "the market" is really a handful of giants plus 490 smaller passengers.

Price-weighted: the odd one out

The Dow Jones is price-weighted: a $300 stock moves the Dow 3× as much as a $100 stock, regardless of company size. This is an accident of 1896 construction, not logic. It is why the Dow and S&P often disagree about the same day.

Equal-weighted: the protest vote

Equal-weight indexes give every company the same slice. They overweight small companies and underweight giants — historically they outperform cap-weighted in small-cap-friendly regimes and lag badly when mega-caps lead. There is no "correct" index — each encodes a philosophy.

Sources

• S&P 500 MethodologyS&P Dow Jones Indices
• Cap-Weighted IndexInvestopedia