Moneyzine
Contents
/Investment Guides /Fundamental Weight Index

Fundamental Weight Index

Moneyzine Editor
Author: 
Moneyzine Editor
2 mins
November 6th, 2024
Advertiser Disclosure
Fundamental Weight Index

Definition

The term fundamental weight refers to a specific approach used in the calculation of a market index. With a fundamental weight index, an economic factor such as revenues or net income determines the equity's influence on the index.

Explanation

Also referred to as a stock market index, an equity index is a sample of equities, or common stocks, which are used as a benchmark when comparing the performance of a smaller set of equities or an individual stock. The method used to determine how an index is calculated is important for the investor-analyst to understand, since it provides insights into the significance of the index's movement over time.

If an index is calculated using the fundamental weight approach, a single factor, or a combination of fundamental factors determines that security's influence, or effect on, the movement of the index. The common stock of a company with strong and improving fundamentals will cause the index to move to a greater extent than a weak or weakening company. Typical fundamental factors are those that might be used in corporate valuation such as revenues / sales, book value, dividends, cash flow or earnings.

One of the benefits of a fundamental index is the approach can help negate a bias caused by one sector, especially if only one factor is used in the calculation. For example, fundamental factors are typically used to derive a company's intrinsic value, whereby an index based on capital weight also assigns extrinsic value to the index. Proponents of this approach point to the fact the weight is based on a quantifiable measure of the company's performance. Critics claim the approach is too complex and requires the investor to understand how the index is calculated.

The S&P 500 Value Index is an example of a fundamental weight index.

Related Terms

  • Capitalization Weight (Cap Weight)
    The term capitalization weight refers to a specific approach used in the calculation of a market index. With a capitalization weight index, the total market value of the security determines its influence on the index.
    Moneyzine Editor
    Moneyzine Editor
    November 6th, 2024
  • Equity (Investment)
    The term equity refers to a security traded on a stock exchange that represents ownership in a company. The value of that ownership can be found using the company's assets and liabilities.
    Moneyzine Editor
    Moneyzine Editor
    November 6th, 2024
  • Index Weighting
    The term index weighting refers to the approach used in the calculation of a market index. The factors used for index weighting determines how much influence an individual security has on the movement of the index over time.
    Moneyzine Editor
    Moneyzine Editor
    November 6th, 2024
  • What Is an Equity Index (Stock Market Index)?
    The term equity index refers to a sample of equities used to measure the performance of a sector of equities. An equity index is a tool investors use to understand how individual equity performs relative to its peers.
    Hristina Nikolovska
    Hristina Nikolovska
    January 17th, 2024
  • The term price weight refers to a specific approach used in the calculation of a market index. With a price weight index, the total market value of the security determines its influence on the index.
    Moneyzine Editor
    Moneyzine Editor
    November 6th, 2024

Contributors

Moneyzine Editor
The Moneyzine editorial team consists of writers and content specialists with diverse backgrounds.
Moneyzine 2024. All Rights Reserved.