What Is a Price-Weighted Index?

A price-weighted index is the arithmetic mean of the sample stock prices in the index.

Price weighted index

Right!

A price-weighted index is the arithmetic mean of the sample stock prices in the index.

A price-weighted index is the sum of the market price of each stock in the index and then divided by the number of all stocks in the index. The price-weighted index assumes that investors buy the same amount of each stock in the index. For example, buy 100 shares for each stock. Because the index is compiled based on price, stocks with higher prices are more important than stocks with lower prices. When the stock is subdivided, the price weighted index is adjusted. The market value weighted index does not need to be adjusted when the ticket is broken down.

The parts in black in the table below are used to calculate the price-weighted index. That is to say, the calculation of the price-weighted index is related to the stock price of the base period and the review period, and has nothing to do with market value.

December 31, 2006	December 31, 2007
	share price	Share capital	Market value	share price	Share capital	Market value
Stock A	30 yuan	800	24,000 yuan	45 yuan	800	36000 yuan
Stock B	20 yuan	1500	30,000 yuan	50 RMB	1500	75,000 yuan
Stock C	40 yuan	1000	40,000 yuan	36 yuan	1000	36000 yuan
total	90 yuan			131 yuan

The specific calculation process of the index is as follows:

1. The price-weighted index for the base period, which is December 31, 2006, is:

1. The impact of high-priced stocks is too great. This is the same reason as the influence of ICBC in the market value-weighted index.

2. The downward trend of the index, that is, the tendency to underestimate. Once the price-weighted index starts to operate, its denominator must be constantly adjusted to reflect changes in stock splits and samples. After the stock is subdivided, the denominator must be adjusted downwards to maintain the continuity and comparability of the index before and after the subdivision. Because after the stock is subdivided, the price becomes smaller. To maintain the index, the denominator must be adjusted accordingly. However, the constant downward adjustment of the denominator brings the problem that the index tends to be low, because fast-growing companies tend to be smaller than slow-growing companies. As a result, large successful companies have continued to spin down their stocks, which has led to their stock prices falling, which in turn has reduced their impact on the index.

1. Dow Jones 30 industrial averages, it is a price-weighted index using only 30 stocks. Critics of the index include:

The number of stocks in the index is too small to be representative.

These 30 stocks represent only the 30 largest stocks on the New York Stock Exchange. However, starting on November 1, 1999, the index includes stocks listed on NASDAQ, such as Microsoft Corporation.

The calculation of the index has a downward tendency, that is, a tendency to underestimate.

2. The Nikkei Dow Jones Stock Average, referred to as the Nikkei 225 Stock Index. The index is the arithmetic average of the price of 225 stocks in the first section of the Tokyo Stock Exchange. The Nikkei 5 index represents only 15% of the first section of the Tokyo Stock Exchange. It is calculated in exactly the same way as the Dow Jones Industrial Average.

1 Jia Guowen. Stock investment wins: the stock market in the eyes of chartered financial analysts [M] .ISBN: 978-7-80218-315-5 / F830.91. China Aerospace Press, 2008 ^[1]