index construction example to demonstrate the impact of the differing index construction methods a small index is being constructed using just four stocks stocks a b c and d in this example, the index weights have been calculated on both a price rated and market capitalization or market cap weighted basis with free float adjustment. Looking first at the free float adjusted market capitalization basis. The share price for each stock is multiplied by the number of shares the company has outstanding and then also multiplies by the free flow to adjustment. For stock D. The free float is 0.1. Meaning only 10% of this company shares are outstanding and not held by long-term investors. This means that the weight that stock D has in the index is substantially reduced below what it otherwise would have been without the free float adjustment. Since if this index did not have the free float adjustment the market capitalization would be over 1.5 million dollars. That is the 21 dollar share price times of 74,000 shares outstanding making it the largest company in the index.

The next step is then to add the free float adjusted Market catalyzation values for each stock to get the total value of the index in dollar terms or 1,145,800 in effect. The index represents a portfolio which holds all the shares in the four companies, which are not held by long-term strategic investors. To calculate the index weights. The flow-adjusted market cap for each stock is then divided by the total float adjusted market cap? Stock C. Has the highest weight in the index of 44% due to the relatively High market capitalization of the company as a whole and due to the free float adjustment of 1.0. Meaning that none of this company shares are held by long-term strategic investors. For the price rated methodology the price per share for the four stocks is added up to give the total of 43 dollars and the weights for each stock are calculated by dividing each individual stock price by the total. In effect, the index is a portfolio containing one share of each of the constituent companies. Stock D represents a significant portion of this index since it has the highest price per share.