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.
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.
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|
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
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