Priceweighted

Priceweighted refers to a method of constructing a stock index where each constituent’s influence on the index is proportional to its price per share. In a priceweighted index, higher-priced stocks have more weight than lower-priced ones, regardless of the company’s overall size or market capitalization. This contrasts with market-capitalization-weighted indices, where weights reflect total market value, and with equal-weighted indices, where each member contributes equally.

Calculation and maintenance: The index value is essentially the sum of the current prices of all constituent stocks divided by a divisor. The divisor is periodically adjusted to maintain continuity when actions affect price levels, such as stock splits, dividends, or the addition or removal of components. Because only prices are used, a stock split lowers its price, which would otherwise reduce the index unless the divisor is adjusted to offset the change.

Notable examples: The Dow Jones Industrial Average (DJIA) in the United States is the most famous priceweighted index, consisting of 30 large blue-chip stocks and maintained with a special divisor. The Nikkei 225 in Japan is another priceweighted benchmark. Critics point out that priceweighting can overweight high-priced, relatively expensive stocks and underrepresent the broader market’s movements.

Advantages and limitations: Priceweighted indices are simple to understand and historically significant, but they can be distorted by price movements independent of market size, require divisor adjustments after corporate actions, and may not accurately reflect overall market performance.