Price-Weighted Index

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DEFINITION of 'Price-Weighted Index'

A stock index in which each stock influences the index in proportion to its price per share. The value of the index is generated by adding the prices of each of the stocks in the index and dividing them by the total number of stocks. Stocks with a higher price will be given more weight and, therefore, will have a greater influence over the performance of the index.

INVESTOPEDIA EXPLAINS 'Price-Weighted Index'

For example, assume that an index contains only two stocks, one priced at $1 and one priced at $10. The $10 stock is weighted nine times higher than the $1 stock. Overall, this means that this index is composed of 90% of the $10 stocks and 10% of $1 stock.

In this case, a change in the value of the $1 stock will not affect the index's value by a large amount, because it makes up such a small percentage of the index.

A popular price-weighted stock market index is the Dow Jones Industrial Average. It includes a price-weighted average of 30 actively traded blue chip stocks.

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RELATED FAQS
  1. How do you compare the Dow Jones Industrial Average (DJIA) and the Toronto Stock ...

    The Dow Jones Industrial Average (DJIA) is an index that tracks performance of the top 30 large companies in the United States. ... Read Full Answer >>
  2. Why is the Dow Jones Industrial Average (DJIA) price weighted?

    A price-weighted index uses the price per share for each stock included and divides the sum by a common divisor, usually ... Read Full Answer >>
  3. How is the value of the S&P 500 calculated?

    The S&P 500 is a U.S.market index that gives investors an idea of the overall movement in the U.S.equity market. The ... Read Full Answer >>
  4. What's the difference between the Dow Jones Industrial Average and the S&P 500?

    The major difference between these two indexes is that the Dow Jones Industrial Average (DJIA) includes a price-weighted ... Read Full Answer >>
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