Market capitalisation-weighted stock market indices are widely followed as a gauge of market mood and direction. In investment management, they serve as benchmarks for active managers or as underlyings for indexing strategies.

From a practical standpoint, cap-weighting can be justified by its cost efficiency and ease of implementation. From the theoretical standpoint, William Sharpe’s Capital Asset Pricing Model (CAPM) supports cap-weighting, by predicting that a cap-weighted index of all assets gives the best risk-adjusted performance.