In a capitalisation-weighted security market index, how is the weight assigned to each security determined?

The weight of each security in a capitalization-weighted index is determined by its market capitalization, which is calculated as the product of the security's price and the number of shares outstanding. In this approach, each security's weight reflects its relative size in the overall market.

By multiplying the share price by the number of shares outstanding, the market capitalization of each security is established. This market capitalization is then used to calculate the overall index value, with larger companies having a more significant influence on the index's performance due to their higher market weights. This method ensures that changes in the market value of the larger companies have a more substantial impact on the index than those of smaller companies, accurately reflecting the market's composition and performance dynamics.

In this context, understanding that capitalization-weighted indices prioritize larger companies based on their market value is crucial for analyzing investment strategies and interpreting market trends.