Equityweighted

Equityweighted, also written as equity-weighted, is a method used to assign weights to the components of a portfolio or index based on their equity value, typically measured by market capitalization. Under this approach, larger companies by market value receive higher weights, while smaller companies receive smaller weights.

In practice, the weight of a security i is calculated as its market capitalization (price times shares outstanding) divided by the total market capitalization of all included securities. Some implementations use float-adjusted market capitalization, which excludes shares not readily available for trading. Equity weighting is a common default in many stock indices and exchange-traded products, reflecting relative size and liquidity within the index.

Applications include index construction, portfolio management, and risk modeling. The method aims to capture the economic footprint of firms and to provide a straightforward, scalable weighting scheme. Major global indices commonly employ market-cap weighting, though float-adjusted and other refinements are also used.

Advantages of equity weighting include alignment with relative company size and liquidity, automatic rebalancing to reflect market movements, and broad market coverage. Disadvantages include concentration risk, as a few mega-cap stocks can dominate performance, higher volatility in some periods, and potential underrepresentation of smaller firms or sectors with high growth.

Alternatives to equity weighting include equal weighting, price weighting, and fundamental weighting. See also capitalization-weighted indexing, equal-weighted indexing, fundamental weighting, and price weighting.