Market-cap weighting — mechanics and consequences. Market-cap-weighted indexes allocate weight to each company proportional to its market capitalization (price × shares outstanding). This straightforward rule means the largest companies have the biggest influence on index performance. Advantages include low turnover (index changes only when composition or market caps change materially), low implementation cost for passive funds, and the natural tilt toward larger, often more stable firms. However, market-cap weighting can concentrate risk: in periods where a few mega-caps rally, the index can become top-heavy and less diversified by economic exposure despite many constituents.

Alternatives, tradeoffs, and investor implications. Alternatives include equal-weight indexes (give each company the same weight), fundamental-weighted indexes (weight by earnings, book value, etc.), and factor-tilt approaches (value, momentum). Each alternative alters sector and size exposures, often increasing turnover and transaction costs. Investors choosing market-cap exposure get a low-cost, liquid benchmark that truly reflects where capital is invested in the market, but they should be aware of concentration risk and consider complementing with small-cap or factor allocations if they want broader style diversification.