A price-weighted average is used to give higher-priced stocks more influence in an index.

How to Calculate Price-Weighted Average for Stocks

By Motley Fool Staff – Dec 18, 2024 at 3:28PM

Key Points

To calculate a price-weighted average, sum the stock prices and divide by the number of stocks.
This average reflects changes in higher-priced stocks more than lower-priced ones.
Use price-weighted average to gauge high-impact stocks in your portfolio efficiency.
Investor Alert: Our 10 best stocks to buy right now ›

Key findings are powered by ChatGPT and based solely off the content from this article. Findings are reviewed by our editorial team. The author and editors take ultimate responsibility for the content.

A price-weighted average is a simple mathematical average of several stock prices and is often used to construct a price-weighted index. Perhaps the most well-known stock index in the U.S., the Dow Jones Industrial Average is a price-weighted index.

Two people doing paperwork with pen and calculator.

Image source: Getty Images.

In practice, using a price-weighted average to calculate a stock index means that the higher-priced stocks disproportionately influence the index's performance. Here's how to calculate a price-weighted average and how it works.

The calculation

Calculating a price-weighted average

To calculate a price-weighted average, or any arithmetic average for that matter, add the numbers (stock prices) together and divide by the number of stocks in the average.

For example, if you want to calculate a price-weighted average of four stocks with prices of $100, $70, $60, and $30, you can do so as follows:

How it works

To illustrate how a price-weighted average or index works, consider three popular stocks: Apple, Microsoft, and Intel. As of this writing, the share prices of these stocks are:

Company	Share Price
Apple	$94.69
Microsoft	$51.18
Intel	$28.80

Using these share prices, we can calculate a price-weighted average of these three stocks:

Now, let's say that Apple releases some incredibly positive news tomorrow, and its shares jump by 20%, or to $113.62. This would raise the price-weighted average to $64.53, a 10.8% jump.

On the other hand, if Intel stock experienced the same 20% move to $34.56, it would translate to a price-weighted average of $60.14, or a move of just 3.3%. So Apple's 20% move has more than three times the impact of Intel's on our three-stock index.

Of course, this is a simplified example. It's not likely that just one of these stocks would move, and the other two would stay exactly the same, but you get the idea. Plus, there aren't any notable indexes made up of just three stocks.

In a more complicated example, the more expensive stocks in the 30-component Dow Jones Industrial Average, such as 3M ($156.17) and Goldman Sachs ($144.91), would have a much greater influence over the index than lower-priced components, such as Cisco Systems ($26.12) and General Electric ($29.22).