Index Points, Basis Points and Weighting: How One Stock Moves an Index

Basis points and index points

A basis point is one hundredth of a percent: 100 basis points is 1%, and a move of 25 basis points is a quarter of a percent. Yields are quoted in basis points because a change from 4.30% to 4.55% is clearer as 25 basis points than as a 5.8% change in the yield.

An index point is one unit of the index's level. The S&P 500 at 5,000 rising by 1% gains 50 points; the Dow at 40,000 rising by 1% gains 400 points. Points therefore mean nothing across indices and little across years; a 300-point day on the Dow was a large move in 2000 and is an ordinary one now. Percentages and basis points compare; points do not.

Cap weighting

The S&P 500 and most broad indices are weighted by float-adjusted market capitalisation: each company's share price times the number of its shares available to trade, divided by the total for all members.

Weight(i) = Float cap(i) / Σ Float cap

The index level is the total float-adjusted capitalisation divided by a number called the divisor, which is adjusted whenever a member is added or removed or issues or buys back shares, so that the level is continuous across such events and reflects price moves alone.

A stock's contribution to the index's move is its weight times its own return:

Contribution(i) = Weight(i) × Return(i)

The index's percentage move is the sum of every member's contribution, and the move in points is that sum times the index level. A company with a 6% weight that rises 5% contributes 30 basis points; with the index at 5,000, that is 15 points. A company with a 0.1% weight that rises 20% contributes 2 basis points, one point.

Four stocks, two of them with headline-sized moves, add up to 31 basis points: the two large names did almost all of it. That arithmetic is why the daily news about an index is usually news about its largest members.

The exceptions

The Nasdaq 100 is a modified cap-weighted index: it caps the weights of its largest members so that no single company exceeds 24% and the companies above 4.5% together do not exceed 48%, with a special rebalance when they do, as in July 2023. The caps change the contribution arithmetic slightly for the largest names and not at all for the rest.

The Dow Jones Industrial Average is price-weighted: the thirty share prices are added and divided by a divisor, with no reference to company size. A one-dollar move in any member moves the average by the same amount, about six points with the current divisor, so a 500-dollar stock has ten times the influence of a 50-dollar one whatever their market values. That is why the Dow and the S&P 500 regularly disagree about the day.

Concentration

Cap weighting means a long rally in a few names makes them an ever larger share of the index. By 2024 the ten largest S&P 500 companies were about a third of its capitalisation, more than at the peak of the technology bubble in 2000, and the seven largest technology companies alone around 30%. The index's return in such years is mostly those companies' return, and its risk is concentrated in them: a 10% fall in a 6% weight costs the index 60 basis points before any other stock moves. The equal-weight version of the same index, in which every member is 0.2%, is the standard comparison for how the average stock is doing.

On the desk

Index Impact works the arithmetic above live for the S&P 500, the Nasdaq 100 and the Dow 30: every constituent's weight times its move, summed into basis points and points, with the five names adding most and the five taking most away, the share of each basket's weight that has a price, and a scenario editor in which any name can be given a move to see what it does to the index.