Priceweighting

Priceweighting refers to a method for constructing or interpreting a stock index in which each constituent’s influence on the index is proportional to its price per share. In a price-weighted index, the index value is typically computed as the sum of the component prices divided by a divisor that is adjusted over time to maintain continuity after corporate actions such as stock splits or spin-offs.

In practice, the index value equals (P1 + P2 + ... + Pn) / D, where Pi are the prices of the individual stocks and D is a divisor chosen to keep the index on a comparable scale. Because weights depend on price rather than market size, higher-priced stocks have a greater impact on moves in the index regardless of their overall market capitalization. The divisor is periodically revised to offset effects of splits, dividends, or other actions so that such actions do not cause artificial jumps or drops in the index.

Price weighting is historically associated with the Dow Jones Industrial Average, a famous price-weighted index consisting of a fixed set of blue-chip stocks. Its structure means that performance is more sensitive to price movements of higher-priced components, and it can overstate or understate economic trends compared with capitalization-weighted benchmarks.

Advantages of price weighting include simplicity and intuitive appeal, while disadvantages include bias toward high-priced stocks and a lack of proportional representation of company size or overall market value. As a result, price-weighted indices are often used for historical reference and education, but many modern benchmarks adopt market-cap weighting or alternative schemes to reflect the size of the underlying companies more accurately.