by Index funds may take different approaches to track a market index: some invest in all of the securities included in a market index, while others invest in only a sample of the securities included in a market index.
Market indexes often use a company’s market capitalization to decide how much weight that security will have in the index. Market capitalization (or “market cap”) is a measure of the total value of the company’s shares. The total value is equal to the share price times the number of shares outstanding. In a market-cap-weighted index, securities with a higher market capitalization value account for a greater share of the overall value of the index. Some market indexes, such as the Dow Jones Industrial Average, are “price-weighted.” In this case, the price per share will determine the weight of a security.
Some index funds may also use derivatives (like options or futures) to help achieve their investment objective.
