Index weighting

The index weighting of stock market indices is a method of financial mathematics. The aim is to take into account the individual companies in a stock index according to their respective importance and size.

method

In index weighting, the mean values are determined from the individual values available. The aim is for the index to reflect the real circumstances as precisely as possible. Its weighting should therefore be based on the overall environment. The index weighting procedures differ primarily in the selection of criteria that are used to determine the weight. Frequently chosen criteria are: share price, turnover on the stock exchange, market capitalization - total or limited to free float -, frequency of occurrence of the individual values. The determination of the index weighting is based on a defined observation period. The weighting of the individual values in an index is regularly checked and adjusted accordingly. In many indices there is also an upper limit for the individual weights. In the DAX, for example, this has been 10% since 2006. In the Russian RTS index , the upper limit is 15%.

The index is then calculated based on n companies as follows:

{\ displaystyle index level = \ sum _ {k = 1} ^ {n} index weight_ {k} \ cdot share price_ {k}}

The index level is therefore a convex combination of the share prices.

Procedure for specific indices

DAX

The calculation of the DAX is based on the index formula from Étienne Laspeyres . When calculating the DAX, the prices of the 30 companies listed in the DAX are weighted differently. The decisive factor for the weighting is the market capitalization of the shares in free float and not the entire market value of a company. This is why Volkswagen, for example, is weighted less than Bayer, Siemens, Daimler and BASF. Together, these companies have a weight of over 35 percent and their share prices have a correspondingly strong influence on the development of the DAX.

Dow Jones Composite Average

The Dow Jones Composite Average is a purely price-weighted index. The index level is determined solely on the basis of the share price; there is no index weighting. The calculation is based on adding up the individual share prices and then dividing them by the number of shares in the index. The number of shares in free float is not taken into account.

CAC 40

When calculating the CAC 40 , the weighting of the individual values is based on two pillars: the company's total market capitalization and the stock market value in free float. The heavyweights are (as of July 2016) Total and Sanofi with index weights of 9.27% and 8.91% respectively. The eight smallest companies in the index all have an index weighting of less than 1%, the smallest even less than 0.5%.

EURO STOXX 50

The weighting of the EURO STOXX 50 is based on market capitalization in relation to the shares in free float. There is a weighting cap of 10%. The heavyweights (as of August 15, 2019) are: Total (5.22%), SAP (5.16%), Linde (3.98%), LVMH (3.96%), Allianz SE (3.63 %) %), Sanofi (3.53%) and Siemens (3.42%).

Others

The Hungarian mineral oil company MOL has around 25% of the total index weighting of the Budapest Stock Exchange Index (BUX) on the Budapest Stock Exchange .

Individual evidence

↑ Broker-Test Börsenlexikon accessed on July 6, 2016
↑ Stock market news accessed on July 6, 2016
↑ Onvista.de: Facts and useful information about the DAX, accessed on July 6, 2016
↑ STOXX Limited: Factsheet (PDF; 29 kB). As of August 15, 2019. Accessed August 16, 2019.

[1] Broker-Test Börsenlexikon accessed on July 6, 2016

[2] Stock market news accessed on July 6, 2016

[3] Onvista.de: Facts and useful information about the DAX, accessed on July 6, 2016

[4] STOXX Limited: Factsheet (PDF; 29 kB). As of August 15, 2019. Accessed August 16, 2019.