Price-Weighted Index
A price-weighted index assigns each constituent stock a weight proportional to its share price rather than its market capitalisation, so that higher-priced stocks have greater influence on the index regardless of company size; the Dow Jones Industrial Average (DJIA) in the US is the most famous example — no major Indian index uses price weighting.
In a price-weighted index, the index level equals the sum of the prices of all constituent stocks divided by a divisor. The divisor is adjusted over time to account for stock splits, dividends, and composition changes to maintain index continuity. A stock priced at ₹5,000 has exactly ten times the influence of a stock priced at ₹500 on a price-weighted index, irrespective of whether the ₹500 stock represents a company ten times larger in market capitalisation.
The Dow Jones Industrial Average was created in 1896 by Charles Dow and was a natural choice at the time because calculating market capitalisations of individual companies was operationally difficult in the pre-computerised era. The simplicity of adding up stock prices and dividing by a fixed number made the calculation feasible by hand. The DJIA still uses this methodology today, making it an anachronism in modern financial analysis — the index is widely followed but considered an imperfect representation of US equity market performance precisely because of its price-weighting.
The structural flaw of price weighting is that it creates arbitrary and misleading concentration. A company that has undergone multiple stock splits will have a low share price relative to its fundamental value, reducing its weight in a price-weighted index — not because the company has become less important, but because of a cosmetic capital structure decision. Conversely, a company that has never split its stock will have a disproportionately high weight.
In India, neither the Nifty family of indices nor the Sensex uses price weighting. Both NSE and BSE adopted free-float market cap weighting — considered the most economically meaningful standard — from the outset of index reform. The Nifty 50 index revision in 1996 and the Sensex methodology updates have consistently used free-float market cap as the weighting criterion.
Understanding price weighting is nonetheless useful for Indian investors tracking global indices. The DJIA's composition and movement is widely reported in Indian financial media as a proxy for US market sentiment, and analysts who understand its price-weighted nature are better positioned to contextualise why the DJIA sometimes moves differently from the S&P 500 (which is cap-weighted) during the same period.