What is the purpose of a capitalisation-weighted index?

A capitalization-weighted index is specifically designed to reflect the total market value of the securities that are included in the index. This type of index assigns weights to each security in proportion to its market capitalization, meaning that larger companies have a greater influence on the index's performance compared to smaller companies.

The rationale behind this weighting method is to provide a more accurate representation of the market as a whole. By reflecting the total market value, the index captures the performance of the market based on the sizes of the companies within it, which is crucial for investors looking to track market trends or to create investment strategies.

In contrast, other weighting methods, such as equal weighting or price weighting, do not take into account the total market capitalizations of the included securities, which may lead to skewed perceptions of market performance.