Price-weighted index

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    In a price-weighted index, the index is influenced by the individual share price of each listed stock. It differs from a market weighted index in the sense that a company with a smaller market capitalisation can have an equal or greater weighting to the index as one which has a larger market 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 shares. This gives the share price.

    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.

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    Examples of well-known price-weighted indices are the Dow Jones Industrial Average and the Nikkei 225

    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.

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