A price-weighted index uses the price per share for each stock included and divides the sum by a common divisor, usually the total number of stocks in the index. The Dow Jones Industrial Average (DJIA) is an example of this type of index. When it was created in 1896 by Charles Dow, it was meant to reflect the average price of stocks in the marketplace.
Charles Dow likely chose to create a price-weighted index due to its simplicity. At the time, investors were new to the idea of stocks. Previously, bonds were the typical investment and their price stability and interest payments were easy for investors to grasp. The Dow Jones Industrial Average gave investors a simple way to track the stock market's performance. Thus, the index that originally contained 12 companies was calculated by adding all the stocks' prices and then dividing that number by 12. In the current market, some people feel this is an antiquated and irrelevant calculation. However, the Dow Jones historically tracks along the same trends as those in the broader market and often predicts upcoming trends.
There is some bias involved that also affects how investors perceive the value behind the Dow Jones statistic. Each of the 30 companies included in the index are picked by The Wall Street Journal. This, coupled with the seemingly arbitrary calculation, lacks credibility in some investors' minds. Over time, the divisor was adjusted from simply the number of companies on the index to a number that helps account for stock splits and reverse splits that affect the price per share. As of August 2014, the divisor is around 0.1557. The current divisor is published by The Wall Street Journal.