An index follows a recipe for combining prices
A market index summarises a selected group of securities using a defined calculation method. In a capitalisation-weighted index, larger companies generally carry more weight. If one company has a 20% weight and rises 10% while everything else stays unchanged, it contributes roughly 2% to the index.
Go deeper
The weighting rule shapes the result
An index is a constructed measure, not a naturally occurring market average. Its rules determine which securities qualify, how much influence each receives and when the composition changes.
In a simplified capitalisation-weighted index, a company with a 20% weight rising 10% contributes approximately 2 percentage points to the index return if the other constituents are unchanged.
An equal-weighted index gives each constituent the same starting weight at rebalancing, so it can behave differently even when it contains the same companies.
Index returns also depend on whether the measure tracks prices alone or includes reinvested distributions. Two figures labelled market performance can therefore describe different baskets, different weights or different treatments of dividends.