As it relates to investment in various types of securities, equal weight is a term that refers to the practice of placing the same level of importance on each security that composes an index fund or a portfolio. Using an equal weight approach allows an investor to consider the stocks issued by various companies without regard to the actual size of the business, or that company’s particular market share. This particular weighting strategy does not rely on the market capitalization that is common with some other weighting approaches.
One of the benefits of equal weight is that the investor is exposed to investment opportunities that may be overlooked using other methods. For example, if the stocks are evaluated simply on the basis of price, the investor is likely to find some stocks that are of interest, but may miss out on some deals by companies that do not appear in the same range on a price-weighted index. At the same time, by granting equal importance to all securities traded on the market, an investor can look beyond the giant companies that are traded in the marketplace, and stand a better chance of discovering a smaller entity that exhibits the potential for developing into a very lucrative investment.
With the equal weight approach, it is important to keep in mind that the securities identified in this manner are likely to have higher trading costs than those investments identified using other means. In general, it is not unusual for index funds that are evaluated using this approach of equal importance to have a higher turnover rate. Assuming that the stock in question does show promise of a solid return within a given period of time, those slightly higher trading costs are easily offset. The investor simply holds onto the shares, rides the crest of the upward swing, then sells them just before the shares begin to level off.
As with all investment strategies, assigning equal weight to all securities associated with a given index fund or portfolio the same level of importance is not a foolproof way of earning a return. There is still a need for the investor to make informed decisions about the future movement of the investment, what amount of return can reasonably be anticipated within a given time frame, and how well that potential return fits into the overall financial goals of the investor. Taking these factors into consideration, as well as the degree of volatility or risk associated with the investment, will increase the chances of making the trade worth the time and effort.
