A price-weighted index is a
stock market index
In finance, a stock index, or stock market index, is an Index (economics), index that measures the performance of a stock market, or of a subset of a stock market. It helps investors compare current stock price levels with past prices to calcul ...
where each constituent makes up a fraction of the index that is proportional to its price. A stock trading at $100 will thus make up 10 times more of the weight of the total index compared to a stock trading at $10.
The
Dow Jones Industrial Average
The Dow Jones Industrial Average (DJIA), Dow Jones, or simply the Dow (), is a stock market index of 30 prominent companies listed on stock exchanges in the United States.
The DJIA is one of the oldest and most commonly followed equity indice ...
and
Nikkei 225
The Nikkei 225, or , more commonly called the ''Nikkei'' or the ''Nikkei index'' (), is a stock market index for the Tokyo Stock Exchange (TSE). It is a price-weighted index, operating in the Japanese yen, Japanese Yen (JP¥), and its compone ...
are commonly given as examples of price-weighted stock market indexes, although the Nikkei is not a "pure" price-weighted index.
Unlike a market-cap weight index, which selects stocks automatically by market capitalization, a price-weighted index will need some alternative method of stock selection. For example, the Nikkei 225 constituents are selected by committee, taking into account liquidity (high trading volume) and representativeness of market sectors.
[https://indexes.nikkei.co.jp/nkave/archives/faq/faq_nikkei_stock_average_en.pdf]
To be meaningful, a price-weighted index will need some way of adjusting for shares outstanding. For example, two companies with the same market cap may have very different share prices purely because they have issued different numbers of shares, even if the companies differ in no other way. The Nikkei 225 adjusts each price by an "adjustment factor" to ensure that no stock represents more than 1% of the index.
[https://cbonds.it/download/indexdocs/indexdescrs/1354/]
See also
*
Fundamentally based indexes Fundamentally based indexes or fundamental indexes, also called fundamentally weighted indexes, are indexes in which stocks are weighted according to factors related to their fundamentals such as earnings, dividends and assets, commonly used when pe ...
*
Capitalization-weighted index
A capitalization-weighted (or cap-weighted) index, also called a market-value-weighted index is a stock market index whose components are weighted according to the total market value of their outstanding shares. Every day an individual stock's ...
References
External links
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Price-weighted calculation methodology via Wikinvest
Business terms
Financial markets
Stock market indices
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