Equal weighted index
Also written Equal weight index
An index where every constituent starts with the same weight; as prices move the weights drift apart, so the portfolio must be rebalanced by selling winners and buying losers.
In plain language
An equal-weighted index ignores both company size and share price. Every stock gets the same slice. With four stocks, each is 25%; with fifty, each is 2%.
To get there, the number of shares held of each stock is adjusted so that the rupee value of every holding is identical on the start date.
The weights do not stay equal. The moment prices move, the stocks that rose are worth more than their share and the stocks that fell are worth less. To restore equal weights, the workbook says, the fund manager needs to sell those stocks that have increased in price and buy the stocks that have fallen in price. That periodic rebalancing is what makes an equal-weighted index different in practice as well as in arithmetic.
How it works
Two steps:
- At construction, choose quantities so that price × quantity is the same for every stock. Each weight = 1 / number of stocks.
- At any later date, the index change is the sum over all stocks of (percentage price change × original weight) — which, because every original weight is equal, is simply the average of the percentage price changes.
Then, to keep it an equal-weighted index, rebalance: trim holdings now above the target weight and add to holdings below it.
This is the opposite behaviour from a market-cap index, where rising stocks are simply allowed to grow their weight.
The formula
Index change = Σ (% price change of stock × original weight)
New index = Old index × (Current total value / Original total value)
A worked example
The workbook's four-stock index, built on 1 January 1995 with Rs 30,000 in each stock:
| Stock | Price 1995 | Qty | Value 1995 | Weight | Price now | Value now | % change | × old weight |
|---|---|---|---|---|---|---|---|---|
| P | 100 | 300 | 30,000 | 0.25 | 150 | 45,000 | 50.00% | 12.50% |
| Q | 150 | 200 | 30,000 | 0.25 | 130 | 26,000 | −13.33% | −3.33% |
| R | 125 | 240 | 30,000 | 0.25 | 200 | 48,000 | 60.00% | 15.00% |
| S | 200 | 150 | 30,000 | 0.25 | 180 | 27,000 | −10.00% | −2.50% |
| Total | 1,20,000 | 1.00 | 1,46,000 | 21.67% |
New index = 1,46,000 / 1,20,000 × 100 = 121.67
Now look at the weights today: P is 45,000 / 1,46,000 ≈ 30.8% and R is 48,000 / 1,46,000 ≈ 32.9% — both above 25%. Q (≈17.8%) and S (≈18.5%) are below. To restore equal weights, sell some P and R, buy some Q and S.
Why NISM asks about it
Chapter 2, section 2.3. The paper tests the calculation (new index value from a table) and the consequence (rebalancing requires selling the risers and buying the fallers). Contrast questions with price-weighted and market-cap weighted indices are common, so learn the one-line "weight decided by" for each method.
Common exam traps
- Equal weights do not stay equal. Only at construction and immediately after rebalancing are they equal.
- Rebalancing sells the winners. An option saying the manager buys more of the stocks that rose is the market-cap intuition applied to the wrong index.
- Use the original weight when multiplying percentage changes, not the current weight.
- The index moved 21.67% even though two of four stocks fell — the index change is an average, not a count of risers.
Where this is taught
- Series XXI-B · Chapter 12: Introduction to Indicesintroduced here
- Series V-D · Chapter 14: Understanding Indexintroduced here
- Series XIX-C · Chapter 10: Introduction to Indices and Benchmarkingintroduced here
- Series XIX-E · Chapter 8: Indices and Benchmarkingintroduced here
- Series VIII · Chapter 2: Understanding Indexintroduced here
Related terms
- Free floatThe part of a company's shares readily available for trading — broadly, what is not locked up with promoters. Indices, position limits and MWPL are all measured on it.
- IndexA statistical indicator that tracks a portfolio of securities representing a market or part of it, expressed as a change from a base value — so the percentage move matters, not the number itself.
- Price-weighted indexAn index in which each stock counts in proportion to its share price — the sum of prices divided by the number of stocks — so a high-priced share moves it most, whatever the company's size.
- Value weighted indexAn index weighting each stock by its market capitalisation, or free-float market capitalisation, divided by the total — the most popular method, and the natural basis for index funds and derivatives.
- Index divisorThe number an index total is divided by — set at inception so the index starts at a convenient 100 or 1,000, then adjusted so splits and constituent changes do not move the index level.
- Fundamental weighted indexAn index weighting constituents by company fundamentals such as sales, profits, book value, cash flow or dividends rather than market value — built to avoid overweighting overvalued stocks.
- GDP weighted indexA global index that weights each country by the size of its economy (GDP) rather than its stock market, correcting the tilt of market-cap indices towards developed countries.
- Smart Beta FundAn extension of index funds and ETFs that changes how the index is weighted — equal weights or other parameters instead of market capitalisation — to improve returns, diversify more and reduce risk.
- Base valueThe starting level an index is set to on its base date — often 100 — from which every later index value is expressed as a change, so the percentage move matters more than the number.
- Index constructionChoosing an index's constituent stocks and deciding its calculation methodology — a trade-off between diversification and liquidity, with the final inclusion call taken by an Index Committee.