Market-cap weighting sizes each position by company size: w_i = mcap_i / Σ mcap. A company worth ₹15 lakh crore in a basket totalling ₹150 lakh crore gets 10 percent of the portfolio. It is the default construction for almost every headline index in the world, including the Nifty 50, which uses free-float market capitalisation rather than total market cap.
Free float matters. Promoter holdings, government stakes and locked-in shares are excluded, so the weight reflects what the market can actually trade. A company with 75 percent promoter holding carries roughly a quarter of the index weight its total market cap would suggest.
Why indices use it
Cap weighting has one property no other scheme shares: it is self-maintaining. When a stock’s price doubles, its market cap doubles and so does its target weight, which means the portfolio needs no trade to stay on target. Turnover comes only from index reconstitution and corporate actions, not from price drift.
| Property | Market-cap weight | Equal weight |
|---|---|---|
| Rebalancing turnover from price drift | None | Every rebalance |
| Tilt versus universe | Toward large caps | Toward small caps |
| Capacity at scale | High | Constrained by small-cap liquidity |
| Largest position | Can dominate | Fixed at 1 / N |
Concentration is the trade-off
Cap weighting concentrates. In the Nifty 50 the largest names carry double-digit percentage weights while the smallest sit under 1 percent, so a handful of stocks drive most of the index’s daily movement. NSE’s methodology applies a 10 percent cap on any single stock’s weight at rebalance for the Nifty 50, which is an admission that unconstrained cap weighting can become uncomfortably top-heavy.
The scheme also buys more of whatever has already gone up. That is fine in a trending market and painful at a top, because the portfolio is at its most concentrated in the most expensive names precisely when a bubble deflates. Anyone who held a cap-weighted Indian technology basket into 2000 or a cap-weighted global index into 2008 learned the mechanic directly.
When to choose it
Use market-cap weighting when you want your strategy’s return to be comparable to a benchmark, when capital is large enough that small-cap liquidity binds, or when you want turnover close to zero between reconstitutions. Avoid it when your selection rule already screened for something the market has not priced, because cap weighting will hand most of the money to the names where that edge is smallest.
A common middle path is cap weighting with a concentration limit, which keeps the liquidity profile while capping single-name risk.