In a price-weighted indexIn a price-weighted index, the index is influenced by the in... More, the index is influenced by the individual priceWhat are value stocks? A value company is a company that app... More of each listed stock. It differs from a in the sense that a company with a smaller market capitalisationMarket capitalisation (short: "market cap") is the total ma... More can have an equal or greater weighting to the index as one which has a larger marketWhat are value stocks? A value company is a company that app... More cap. In other words a large established company that may be worth $10 billion dollars may actually have less weighting than one worth $5 billion.
The value of a stock is calculated by taking the market cap of a company and dividing it by the number of outstanding sharesWhat are value stocks? A value company is a company that app... More. This gives the share priceWhat is price? The price is the measure of the value of good... More.
In a price weighted index stocks with a higher share price are given more weight and have more influence on the index. Conversely, lower-priced stocks will have considerably less effect.
Examples of well-known price-weighted indices are the and the
Understanding price weighting
For example, a stock priced at $100 would have an influence on the index’s 50 times greater than a stock priced at $2. Any change in the price of the $2 stock would have virtually no effect on the overall value of the index.
Price-weighted indices must be constantly adjusted to take into account the price changes of higher-priced stocks as they are the ones that move the index most. Each listed stock has its price rebalanced to ensure it maintains a proportionate weight compared to the other components of the index.
