Price-Weighted Index

A price-weighted index is a stock index where each company's influence on the index level depends only on its share price, not on the overall size of the company. A stock trading at $300 pushes the index around far more than a stock trading at $30, even if the $30 company is actually much larger in terms of total market value.

The way it works: you add up the prices of all the stocks in the index, then divide by a number called the divisor. The divisor is adjusted over time so that things like stock splits, mergers, or changes in the list of companies don't cause artificial jumps in the index. Without that adjustment, a simple 2-for-1 stock split would cut a company's price in half and drop the whole index, even though nothing real changed for investors.

The nuance that trips people up is that "price-weighted" has nothing to do with a company's actual economic size. A small company with an expensive stock price can move a price-weighted index more than a giant company whose stock happens to trade at a low price. This is different from a capitalization-weighted index, where influence is based on total market value (share price multiplied by number of shares outstanding), which is how most broad market indexes are built. The Dow Jones Industrial Average is the best-known example of a price-weighted index; most other major indexes, like the S&P 500, are cap-weighted instead.