Price Weighted Index is a type of stock market index where each stock contributes to the index value based on its price per share, rather than its market capitalization. This means that companies with higher stock prices have a greater influence on the indexís movements, regardless of their actual size or market value.

In a price-weighted index, the calculation involves adding up the prices of all component stocks and dividing the total by a specific divisor. This divisor adjusts for events like stock splits, bonuses, or other corporate actions to maintain consistency in the index value. For example, if a company in the index undergoes a 2-for-1 stock split, the divisor changes so that the overall index value remains unaffected by such structural changes.

The most well-known example of a price-weighted index is the Dow Jones Industrial Average (DJIA) in the United States. The DJIA includes 30 major companies, and movements in higher-priced stocks like Apple or Goldman Sachs can significantly impact the index, even if their market capitalization is smaller than others. In contrast, a company with a low share price but large market cap has a smaller effect.

While price-weighted indices are simple to compute and understand, they have certain limitations. The biggest drawback is the disproportionate influence of high-priced stocks, which may not accurately represent the overall market or sector performance. Therefore, analysts often use market-cap-weighted indices like the Nifty 50 or S&P 500 for a more balanced view.

Understanding how a price-weighted index works helps investors interpret market trends correctly and recognize how index composition can influence performance readings and investment decisions.