Price Weight vs. Value Weight Indices: Understanding the Differences

A stock index reflects the movement in a group of companies.

Price-weight and value-weight indices are two ways to value a collection of related companies. The computation of index prices and movements are quite different for the two types of indices.

Market Index

A market index is a basket of stocks that represent a certain portion or sector of the stock market.

Price Weight Index

A price weight index assigns weight in an index in proportion to the stock price of the underlying companies. For example, a stock with a $100 share price will have 10 times the effect on the index as a company with a $10 share price.

Value Weight Index

In a value-weight index, each company's market capitalization determines its weight in an index, regardless of share price. Thus, a $100 billion company in a value-weight index carries 10 times the weight of a $10 billion company.

Examples

The Dow Jones Industrial Average is an example of a price-weight index, while the Nasdaq stock market index is a value-weight index.

Trading Effects

In a value-weight index, larger companies account for the bulk of moves in an index. In a price-weight index, small companies can have more effect.