What Does Cap Index Mean?

Cap index is a shortened phrase standing for capitalization-weighted index, a kind of financial market index. The cap index term is often used in conjunction with modifying words that define and narrow the index.

Definition

A cap index tracks the stock value of an index of stocks, weighing individual stocks based on their market capitalization. A cap index therefore gives more weight to its larger stocks.

Varieties

A cap index sometimes is limited to stocks in a certain category of size or industry. For example, a small cap index is limited to small-capitalization stocks, but it still weighs the stocks according to size. Many well-known market indexes are cap indexes, such as the S&P 500 and NASDAQ.

Drawbacks

According to Investopedia, critics sometimes cite the emphasis on the size of a stock as a drawback to cap indexes. The cap index, by definition, demonstrates the movement of stocks based on the money invested in them. For instance, a cap index that shows a strong market may only show strong returns for the largest stocks while smaller stocks struggle.

References

• Investopedia: Capitalization-Weighted Index