In a price-weighted index, stocks are weighted according to their share prices rather than their market capitalisation or the number of shares outstanding. This means that companies with higher stock prices have a greater influence on the movement of the index, regardless of the actual size or value of the company.

The calculation of a price-weighted index is relatively simple. The prices of all component stocks are added together and then divided by a special divisor. The divisor is adjusted periodically to account for events such as stock splits, mergers, or changes in the index composition. These adjustments ensure that the index remains consistent and comparable over time.

For example, if an index contains three stocks priced at $50, $100, and $200, the $200 stock will have the greatest impact on the index's performance. A $10 increase in the $200 stock's price will affect the index more than a $10 increase in the $50 stock because the higher-priced stock carries a larger weight.

One of the most well-known price-weighted indexes is the Dow Jones Industrial Average. In this index, higher-priced stocks contribute more significantly to daily index movements. Critics argue that this approach can be misleading because a stock's price does not necessarily reflect the company's overall size or economic importance. Nevertheless, price-weighted indexes remain widely followed and provide investors with a simple way to track the performance of a selected group of stocks.