What is a 'Price-Weighted Index'

A price-weighted index is 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.

BREAKING DOWN '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
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    Learn how the Dow Jones Industrial Average has told the story of the broad market through its simple, price-weighted calculation ... Read Answer >>
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    Stock indexes are formed based on the kinds of stocks or financial securities they want to track. For example, the Standard ... Read Answer >>
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    The major difference between these two indexes is that the Dow Jones Industrial Average (DJIA) includes a price-weighted ... Read Answer >>
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