Price-Weighted Index

In a price-weighted index, also known as equal dollar weighted index, each component stock contributes only its price when determining the overall index value. Hence, more weight is given to stocks with higher prices.

Calculating the Index Value

The sum of the price of all the component stocks is first obtained and then divided by a divisor to obtain the final index value. The divisor is an arbitrary number that is first defined when the index is first published.

Example

A price-weighted index, ABC, is first published comprising the following public companies A, B and C.

Company Stock Price Shares Outstanding Market Cap Weightage
Company A $30 1,000,000 $30,000,000 20%
Company B $60 500,000 $30,000,000 40%
Company C $60 1,000,000 $60,000,000 40%

As can be seen from the table above, although company C is twice the size of company B but because they have the same stock price, their weightage in a price-weighted index are equal. The total value of the index is: 30 + 60 + 60 = 150. A divisor of 0.15 is selected to start the index off with an even number of 1000.

Initial Index Value = 150 / 0.15 = 1000

Ready to Start Trading?

Open an account at OptionsHouse.com and get 100 commission-free trades + free virtual trading tool!

Your new trading account is immediately funded with $5,000 of virtual money which you can use to test out your trading strategies using OptionHouse's virtual trading platform without risking hard-earned money.

Once you start trading for real, your first 100 trades will be commission-free! (Make sure you click thru the link below and quote the promo code '60FREE' during sign-up)

Click here to open a trading account at OptionsHouse.com now!

Join the Discussions @ The Options Forum

Beginners Questions

Advanced Strategy Talks

RSS Feed Widget

Trading Ideas & Opportunities




Home | About Us | Terms of Use | Disclaimer | Privacy Policy | Sitemap

Copyright 2016. TheOptionsGuide.com - All Rights Reserved.