What does a price weighted index rely on for its trading price?

A price-weighted index fundamentally relies on the trading prices of the individual securities that make up the index. This type of index calculates its value by taking the sum of the prices of its constituent stocks and then dividing that total by a specific divisor. Each stock's influence on the overall index is directly proportional to its price; higher-priced stocks have more impact than lower-priced stocks.

This system means that if a stock with a higher trading price experiences a significant price movement, it will affect the index more dramatically than a stock with a lower trading price, regardless of the total market capitalization or trading volume of the underlying stocks. Notably, this method emphasizes the absolute trading price rather than other factors such as market capitalization or trading volume, which are more relevant for other types of indices.