Price-Weighted

Price-weighting is a process in which the price or value of a component determines how strongly it influences a result.

Price-weighting is commonly used by stock market indexes. In this case, the higher the value of a component of the index, the more strongly that component influences the index.

Example:

An index lists the stocks of 30 companies, the highest of which is valued at 30 billion Swiss francs and the lowest of which is valued at 3 billion Swiss francs.

If the index used the simplest form of price-weighting, the performance of the most expensive company would influence the index 10 times more than the performance of the cheapest company on the index because it is 10 times more valuable.

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