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Price weighting vs cap weighting

Why a dollar of Goldman moves the Dow like a dollar of anyone, and why the S&P sees size instead.

The two big American index families count votes differently, and the difference decides whose moves matter.

A cap-weighted index like the S&P 500 or Nasdaq-100 weights members by float-adjusted market value. A 1% move in a three-trillion-dollar company shifts the index as much as roughly a 60% move in a fifty-billion-dollar one. Size is leverage; mega-caps dominate by construction, which is exactly what these indices are designed to measure: the value of the market.

The price-weighted Dow is a historical artifact that survived: members are weighted by share price alone. Every dollar of price change contributes identical points (about 6.8 points per dollar at the current divisor) whether the company is worth two hundred billion or two trillion. A $700 stock moving 3% swings the Dow harder than a $150 stock moving 10%, regardless of which company is bigger. This is why the Dow can post a gain on a day most of its members fell: one expensive share can outvote the room.

Neither method is wrong; they answer different questions. But you cannot read either honestly without knowing the rule, which is why WMTMT computes exact per-stock point contributions under each index's own arithmetic and checks the total against the official close, every session, in the daily notes.

Part of the WMTMT glossary · the daily notes apply these to every session