Price-weighted index
An index in which each stock counts in proportion to its share price — the sum of prices divided by the number of stocks — so a high-priced share moves it most, whatever the company's size.
In plain language
In a price-weighted index, the only thing that decides a stock's influence is its price per share. A Rs 450 share carries three times the weight of a Rs 150 share, even if the Rs 150 company is ten times bigger.
It is the simplest index there is: add up the prices of the stocks and divide by how many there are. Company size, number of shares and free float play no part.
That simplicity is also its weakness. A share price is partly an accident of history — how many shares a company chose to issue, whether it ever split its stock. A price-weighted index lets those accidents decide who moves the market.
The workbook names two famous examples: the Dow Jones Industrial Average and the Nikkei 225.
How it works
Each stock's weight is its price divided by the sum of all prices. When a stock's price changes, its contribution to the index change is its percentage price change multiplied by its original weight — and summing those contributions gives the index change.
That is the property worth understanding: a 333% rise in a low-priced stock can contribute about as much as a 33% rise in a high-priced one, because the low-priced stock started with a small weight.
Compare the three methods the workbook teaches in Chapter 2:
| Method | Weight decided by |
|---|---|
| Market-capitalisation weighted | Shares outstanding × price |
| Free float market capitalisation | Free-float shares × price |
| Price-weighted | Price alone |
| Equal weighted | Nothing — every stock gets the same weight |
The formula
Price index = Sum of prices of all stocks in the index / Number of stocks in the index
A worked example
The workbook uses the same five stocks as its market-cap example.
Index on 1 Jan 1995 = (150 + 300 + 450 + 100 + 250) / 5 = 1,250 / 5 = 250
Index today = (650 + 450 + 600 + 350 + 500) / 5 = 2,550 / 5 = 510
Change = (510 − 250) / 250 = 104%
Verified stock by stock:
| Stock | Price 1995 | Weight | Price now | % change | % change × weight |
|---|---|---|---|---|---|
| AZ | 150 | 0.12 | 650 | 333.33% | 40.00% |
| BY | 300 | 0.24 | 450 | 50.00% | 12.00% |
| CX | 450 | 0.36 | 600 | 33.33% | 12.00% |
| DW | 100 | 0.08 | 350 | 250.00% | 20.00% |
| EU | 250 | 0.20 | 500 | 100.00% | 20.00% |
| Total | 1,250 | 1.00 | 2,550 | 104.00% |
The same stocks gave 126.06% as a market-cap weighted index. The price-weighted answer is lower because CX, the most expensive share and therefore the heaviest, rose only a third.
Why NISM asks about it
Chapter 2, section 2.3 (Types of Stock Market Indices). The worked table above is exactly how the paper tests it — compute the base and current value, or the percentage change, from a small table of prices. Also expect the identification question: which popular index is price-weighted (Dow Jones Industrial Average, Nikkei 225).
Common exam traps
- Number of shares is irrelevant in a price-weighted index. If a question gives you shares outstanding, it may be a distractor.
- Divide by the number of stocks, not by the base value.
- Sensex and Nifty are not price-weighted. The workbook's price-weighted examples are foreign — Dow Jones and Nikkei 225.
- A large company with a low share price has little influence here. That is the method's defining quirk.
Where this is taught
- Series XXI-B · Chapter 12: Introduction to Indicesintroduced here
- Series VIII · Chapter 2: Understanding Indexintroduced here
- Series V-D · Chapter 14: Understanding Indexintroduced here
- Series XIX-C · Chapter 10: Introduction to Indices and Benchmarkingintroduced here
- Series XIX-E · Chapter 8: Indices and Benchmarkingintroduced here
Related terms
- Base valueThe starting level an index is set to on its base date — often 100 — from which every later index value is expressed as a change, so the percentage move matters more than the number.
- Equal weighted indexAn index where every constituent starts with the same weight; as prices move the weights drift apart, so the portfolio must be rebalanced by selling winners and buying losers.
- Free floatThe part of a company's shares readily available for trading — broadly, what is not locked up with promoters. Indices, position limits and MWPL are all measured on it.
- IndexA statistical indicator that tracks a portfolio of securities representing a market or part of it, expressed as a change from a base value — so the percentage move matters, not the number itself.
- Value weighted indexAn index weighting each stock by its market capitalisation, or free-float market capitalisation, divided by the total — the most popular method, and the natural basis for index funds and derivatives.
- Index divisorThe number an index total is divided by — set at inception so the index starts at a convenient 100 or 1,000, then adjusted so splits and constituent changes do not move the index level.
- Fundamental weighted indexAn index weighting constituents by company fundamentals such as sales, profits, book value, cash flow or dividends rather than market value — built to avoid overweighting overvalued stocks.
- Index constructionChoosing an index's constituent stocks and deciding its calculation methodology — a trade-off between diversification and liquidity, with the final inclusion call taken by an Index Committee.