# Price-Weighted Indexes: How They Work and Examples

## What Is a Price-Weighted Index?

A price-weighted index averages the share prices of included companies, giving greater influence to higher-priced stocks. Familiar examples include the DJIA and Nikkei 225, offering insights into stock market trends. A stock with a higher price will be given more weight than a stock with a lower price and will thus have a greater influence on the index's performance.

### Key Takeaways

*   A price-weighted index is influenced more by stocks with higher prices, making them have a greater impact on the index's movement.
*   The value of a price-weighted index is calculated by summing the stock prices of all companies in the index and dividing by the total number of companies.
*   Adjustments to the divisor are made in price-weighted indexes to maintain continuity during stock splits or changes in the list of included companies.
*   The Dow Jones Industrial Average and Nikkei 225 are examples of popular price-weighted indexes.

## How Price-Weighted Indexes Influence Market Trends

In a price-weighted index, a [stock](https://www.investopedia.com/terms/s/stock.asp) that increases from $110 to $120 will have the same effect on the index as a stock that increases from $10 to $20, even though the percentage move for the latter is far greater than that of the higher-priced stock. Higher-priced stocks exert a greater influence on the index's, or the [basket's](https://www.investopedia.com/terms/b/basket.asp), overall direction.

To calculate a simple price-weighted index, add up the companies' share prices and divide by the number of companies. The divisor might be adjusted to account for stock splits or company changes in some indexes.

Price-weighted indexes are useful as their value matches or resembles the average stock price of included companies. This allows the construction of indexes that will track the average stock price performance of a specific sector or market.

One of the most popular price-weighted stocks is the [Dow Jones Industrial Average (DJIA)](https://www.investopedia.com/terms/d/djia.asp), 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. The Nikkei 225 is another example of a price-weighted index.

## Comparing Price-Weighted Indexes With Other Index Types

Besides price-weighted indexes, there are also [value-weighted](https://www.investopedia.com/terms/c/capitalizationweightedindex.asp) and [unweighted indexes](https://www.investopedia.com/terms/u/unweightedindex.asp). In value-weighted indexes, such as MSCI strategies, the number of outstanding shares matters. The stock's weight in a value-weighted index is found by multiplying the stock price by its shares outstanding.

For example, if Stock A has five million outstanding shares and is trading at $15, then its weight in the index is $75 million. If Stock B is trading at $30, but only has one million outstanding shares, its weight is $30 million. Thus, in a value-weighted index, Stock A has more impact on the index than Stock B.

In unweighted indexes, all stocks equally impact the index, regardless of their share [volume](https://www.investopedia.com/terms/v/volume.asp) or [price](https://www.investopedia.com/terms/q/quoted-price.asp). 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).

Other index types are revenue-weighted, [fundamentally weighted](https://www.investopedia.com/terms/f/fundamentally_weighted_index.asp), and float-adjusted. All have their positives and negatives, depending on the investor's goals and market knowledge.

## The Bottom Line

A price-weighted index, such as the Dow Jones Industrial Average (DJIA), calculates index values by averaging the prices of its constituent stocks. Stocks with higher prices exert more influence on the index's movement. Unlike value-weighted or unweighted indexes, price-weighted indexes emphasize individual stock prices over market capitalization or equal weighting.

This methodology is straightforward but can distort performance perceptions, especially when some stocks have significantly higher prices than others. Understanding these nuances helps investors better gauge market trends and make informed decisions based on index movements.