A price-weighted index is a stock index in which each company's influence is set by its share price, so higher-priced shares move the index more regardless of how large the underlying companies are. The Dow Jones Industrial Average and the Nikkei 225 are the best-known examples.
The index level is found by adding up the share prices of all constituents and dividing by a set figure called the divisor, which is adjusted for events such as stock splits to keep the series consistent. Because weighting follows price alone, a high-priced stock can sway the index even if its total company value is modest.
Its cousin is the market-cap-weighted index, which weights members by company value rather than share price. A quirk of price weighting is that a stock split, which lowers a share price without changing company value, also reduces that stock's pull on the index.
Say a price-weighted index holds two shares priced at 300 and 100, with a divisor of 2, giving an index level of 200.
The 300 share rises by 20 to 320, while the 100 share is unchanged. The new level is (320 + 100) divided by 2, or 210, a gain of 10 points driven by the higher-priced share.