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Definition: Weighted Average Market Capitalization
Weighted Average Market Capitalization is an index based on the market capitalization of the companies in which the fewer bigger organizations with greater market capitalization usually dominate he index because usually these are the organizations that are given higher percentage weight. So thus companies with higher market cap influence the index more. So if the prices of these companies go up the Weighted Average Market Capitalization index also go up.
The average is taken into consideration as companies with smaller market capitalization usually don’t affect the index value. So index helps in determining in what way the change in price of the stock of the companies effect the overall market. The market capitalization of the company may be defined as the number of the shares that are outstanding in the market multiplied by the current price of the stock of that company. Weighted Average Market Capitalization method is used to know and analyze a portfolio’s performance.
The disadvantage of this method is that it is short term concentrated method i.e. if the current price of the stock falls the market capitalization will fall and thus index will fall and thus if it increases also for short period is will increase the index. Moreover, the second disadvantage is that it only takes into consideration only limited companies since only companies manipulate the index.
The example of Weighted Average Market Capitalization is S&P 500
There is one more index that is the price weighted index that only take into consideration the price of the stock of that company. The stocks with higher price is given more weights unlike in Weighted Average Market Capitalization in which value of the company is considered i.e. the number of outstanding shares.