Financial Education

A price weighted index such as the Dow Jones Industrial Average represents the arithmetic mean of the prices of each security in the index.

The Dow Jones Industrial Average is calculated by adding up the prices of each stock in the index, then dividing the total by a divisor, which is an adjustment to reflect the impact of stock splits, dividends and changes in the index components over time.

In a price weighted index, returns are influenced by the stocks trading at the highest price. A stock trading at $100 will have twice as much impact on the index return as will a stock trading at $50.

For more information, see all articles on: Investing in Stocks, Passive Management, Performance Measurement, Portfolio Management

See also:

Value Weighted Index

Unweighted Securities Indexes

Index Weighting Methods

Dow Jones Industrial Average

Volume Weighted Average Price (VWAP)