In a price-weighted index, how do higher-priced securities influence the value of the index?

In a price-weighted index, the value of the index is directly influenced by the price of each underlying security. Higher-priced securities carry a greater weight in the index calculation because the index is computed based on the sum of the prices of the constituent stocks divided by a divisor.

When the price of a security changes, it affects the overall index value in proportion to its price. Therefore, a higher-priced stock will have a more significant impact on the index than a lower-priced stock. For instance, if a stock with a high price increases in value, it will push the index up more than a stock with a lower price would, assuming both stocks have a change of the same dollar amount. This characteristic is a fundamental aspect of price-weighted indexes, highlighting the influence of higher-priced securities in determining the index's performance.

Consequently, understanding how price-weighting works is crucial for interpreting movements within such indexes.