Price-weighted Totally Explained

Everything about Price-weighted totally explained

A price-weighted index is a stock market index where each constituent makes up a fraction of the index that's proportional to its price. For a stock market index this implies that stocks are included in proportions based on their quoted prices. A stock trading at $100 will thus be making up 10 times more of the total index compared to a stock trading at $10. This is different from a market weighted index where stocks are included based on the equity market values of the underlying companies, for example the quoted stock price multiplied by the number of stocks outstanding. The development of a price weighted index won't accurately reflect the evolvement in underlying market values. This is so because the $100 stock above might be that of a small company and the $10 stock that of a large company. A change in the price quote of the small company will thus drive the price weighted index (as it makes up a large part of the index) while the combined market values will remain relatively unaffected without changes in the price quote of the large company.
The Dow Jones Industrial Average is an example of a price weighted stock market index.

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