WHAT IS '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. Adding the price of each stock in the index and dividing by the total number of stocks determines the index’s value. A stock with a higher price will be given more weight than a stock with a lower price and, therefore, will have a greater say in the index’s performance.

BREAKING DOWN 'Price-Weighted Index'

In a price-weighted index, a stock that increases from $110 to $120 will have a greater effect on the index than a stock that increases from $10 to $20, even though the percentage move is greater than that of the lower-priced stock. Higher-priced stocks exert a greater influence on the index’s, or the basket’s, overall direction.

One of the most popular price-weighted stocks is the Dow Jones Industrial Average (DIJA), which consists of 30 different stocks, or components. In this index, the higher price stocks move the index more than those with lower prices, thus the price-weighted designation.

Other weighted indexes

In addition to price-weighted indexes, other basic types of weighted indexes include value-weighted indexes and unweighted indexes. For a value-weighted index, like those in the MSCI family of strategy indexes, the number of outstanding shares is a factor. To determine the weight of each stock in a value-weighted index, the price of the stock is multiplied by the number of shares outstanding. For example, if Stock A has 5,000,000 outstanding shares and is trading at $15, then its weight in the index is $750,000,000. If Stock B is trading at $30, but only has 1,000,000 outstanding shares, its weight is $30,000,000. So, in a value-weighted index, Stock A would have more say in how the index moves than Stock B. 

In an unweighted index, all stocks have the same impact on the index, no matter their share volume or price. Any price change in the index is based on the return percentage of each component. For example, if Stock A is up 30%, Stock B is up 20% and Stock C is up 10%, the index is up 20%, or 30+20+10 / 3, i.e., the number of stocks in the index.

Another type of weighted index is the market capitalization-weighted index, where the shares of each stock are based on the market value of the outstanding shares. Other types of weighted indexes include revenue-weighted, fundamentally-weighted and float-adjusted. All have their positives and negatives, depending on the investor’s goals and market knowledge.

RELATED TERMS
  1. Capitalization-Weighted Index

    Capitalization-weighted index is a market index in which stocks ...
  2. Weighted

    Weighted is a description of adjustments to a figure to account ...
  3. Arithmetic Index

    Arithmetic index uses an arithmetic sum to determine changes ...
  4. Equal Weight

    Equal weight is a type of classification that gives the same ...
  5. Dow Jones U.S. Total Market Index

    The Dow Jones U.S. Total Market Index is a market-capitalization-weighted ...
  6. Capped Index

    Capped index is an equity index that has a limit on the weight ...
Related Articles
  1. Investing

    3 Types of Indexing for ETF Success

    ETF success relies on the index with which it is paired. Explore three index genres for tracking average market performance.
  2. Trading

    Using index futures to predict the future

    Want to know whether the stock market will open up or down? Learn about index futures and how they can help predict how the market will trade.
  3. Investing

    ETF Tracking Errors: Protect Your Returns

    Tracking errors tend to be small, but they can still adversely affect your returns. Learn how to protect against them.
  4. Investing

    Choosing The Right ETF Index To Reach Your Goals

    The key to choosing ETFs for your portfolio is understanding how they pick stocks and making sure their investment philosophy matches yours.
  5. Investing

    3 Index Funds with the Lowest Expense Ratios

    Learn about index mutual funds with the lowest expense ratios.
  6. Investing

    Introduction To Fundamentally Weighted Index Investing

    If you believe the market smiles on those who focus on value, growth or income, this vehicle may be for you.
  7. Insights

    The ABCs Of Stock Indexes

    Indexes can track market trends, but they're not always reliable. Can you trust them?
  8. Insights

    Key indicators for following the stock market and economy

    Learn about some of the key indicators analysts use to follow the U.S. stock markets and to assess the overall condition of the U.S. economy.
  9. Investing

    Enhanced Index Funds: Can They Deliver Low-Risk Returns?

    These funds may look appealing. Find out whether they can really live up to all of their promises.
RELATED FAQS
  1. Is it Possible to Invest in an Index?

    While you cannot buy indexes, which are just benchmarks, we'll show you three ways for you to mirror their performance. Read Answer >>
  2. What does the S&P 500 index measure and how is it calculated?

    Learn about what exactly the S&P measures and why it's used by market participants as a tool to understand the broader stock ... Read Answer >>
  3. Weighted Average Shares Vs. Outstanding Shares

    What's the difference between weighted average shares outstanding and basic weighted average shares? Read Answer >>
  4. How can I find out if a company I like is included in an index?

    Learn how to find out what indexes include a company's stock. Determine the importance of predicting future price movement ... Read Answer >>
Trading Center