© 2020, Nasdaq, Inc. All Rights Reserved. Why a Price-Weighted Index Matters. In practice, using a price-weighted average to calculate a stock index means that the higher-priced stocks have a disproportionate influence on the index's performance. Have a question? #block-survival-2 { display: none; } .carousel-controls{ opacity: 1; } .inline-card-stack__glide .carousel-controls { opacity: 0; } Assessing the value of a company or security can take a few different forms. This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. The Ascent is The Motley Fool's new personal finance brand devoted to helping you live a richer life. A price-weighted index is a stock market index in which the constituent securities are weighed in proportion to their stock price per share. So Apple's 20% move has more than three times the impact of Intel's on our three-stock index. This type of index weighs components on fundamental criteria instead of market capitalization. Larger growth for higher market cap companies can significantly impact the overall index. There are other ways to measure indexes, both weighted and unweighted. The higher the market cap, the higher the percentage a company weighs in an index. This type of market index weighs individual securities according to their total market capitalization. So depending on the fund company you go with, the fundamentally weighted index could be calculated differently. For the DJIA, the higher-priced stock affects the index more than companies with lower prices, even if the change among the lower prices is more significant, percentage-wise. If you'd like to dig deeper into investing, head over to our Broker Center. The price-weighted index rose 5.15 percent based on price appreciation and had a total return of 5.56 percent as 11 of the 29 companies posted positive returns for the three-month period ending Dec. … [CDATA[>*/ To calculate a cap-weighted index, multiply the market price by the total number of outstanding shares. The largest Price-weighted ETF is the SPDR Dow Jones Industrial Average ETF Trust DIA with $22.94B in assets. To find the weight of a particular component of an index, divide its price by the sum of all the components in the index, which looks like: The formula is similar to calculating the percentage of a regular number. var dom1 = document.querySelector('#form1783 #field1');var field1 = new LiveValidation(dom1, {validMessage: "", onlyOnBlur: false, wait: 300});field1.add(Validate.Presence, {failureMessage:"This field is required"});field1.add(Validate.Format, {pattern: /^([^@\s]+)@((?:[-a-z0-9]+\. Another choice: a price-weighted index, in which each member company’s stock in an index is weighted proportionally to its current share price. How to Calculate a Price-Weighted Index. Dow Jones Industrial Average is a prominent example of a price-weighted index. A price-weighted average is a simple mathematical average of several stock prices, and is often used to construct a price-weighted index. Here, you add up the stock prices of the Dow’s 30 components, then divide that sum by the “divisor,” a number that changes regularly depending on what’s happening with the 30 stocks. In a price-weighted index (PWI), companies with a high share price are more valuable than companies with a low share price. Plus, there aren't any notable indices made up of just three stocks.