Glossary term
Price-Weighted Index
A price-weighted index gives higher-priced stocks more influence on the index level than lower-priced stocks.
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What Is a Price-Weighted Index?
A price-weighted index is a stock index in which higher-priced shares have more influence on the index level than lower-priced shares. The weight comes from the stock price, not the company's total market value.
The Dow Jones Industrial Average is the most familiar U.S. example. A company with a $300 share price affects a price-weighted index more than a company with a $50 share price, even if the lower-priced company is much larger by market capitalization.
Key Takeaways
- A price-weighted index weights companies by share price.
- Higher-priced stocks move the index more than lower-priced stocks.
- Stock splits can change a company's index influence even when the business value is unchanged.
- Price weighting is different from market-cap weighting, equal weighting, or factor weighting.
How Price Weighting Works
A simple price-weighted index adds the prices of its component stocks and divides by an index divisor. The divisor adjusts for events such as stock splits, substitutions, and other corporate actions so the index does not jump for mechanical reasons.
The component prices are the stock prices included in the index. The divisor is the adjustment factor used to maintain continuity over time.
Price Weighting Versus Market-Cap Weighting
Method | What Drives Weight | Main Effect |
|---|---|---|
Price-weighted | Share price | Higher-priced stocks matter more |
Market-cap-weighted | Share price times shares outstanding | Larger companies matter more |
Equal-weighted | Same weight for each company | Smaller companies get more influence than in cap-weighted indexes |
What to Watch
Price weighting can make an index less representative of total market value. A stock split can reduce a company's influence even though nothing fundamental changed about the business.
That does not make price-weighted indexes useless. It means investors should know what the index is measuring before using it as a benchmark for the broader market or for a portfolio.
The Bottom Line
A price-weighted index reflects changes in component stock prices, with higher-priced stocks carrying more influence. It is simple and historically important, but it can behave differently from the market-cap-weighted benchmarks many investors use.