In its simplest form, a price-weighted average is just the average price of a group of stocks. It's considered "price weighted" because the same percent increase in a higher-priced stock influences the average more than that of a lower priced stock. Computing the price-weighted average is complicated by stock splits. As an example, if a $30 stock splits into two $15 stocks, the company hasn't lost value, so it would no longer be appropriate to use a simple average with $15 as the stock's price. To compensate for splits, the formula's divisor changes, even if the number of stocks in the average has not. You can also calculate the weighted average per share of a specific stock in a similar manner.
In order to calculate the price-weighted average for stocks, you can use a simple mathematical formula which incorporates the current stock price of each stock.
To get started, you'll need to visit your favorite stock market website to get access to the stocks you're interested in tracking. Once there, enter the ticker symbol for the stocks in question. Get each stock's closing price for the same day. As an example, say you wanted to compute the price-weighted average of just two stocks: Stock ABC closed at $20, and stock XYZ closed at $60.
Add each stock price. In the example, add $60 and $20 to get $80. Divide by the divisor. The first time you compute the price-weighted average, the divisor is simply the number of stocks, but this value may change with stock splits. In the example, dividing $80 by 2 gives a price-weighted average of $40, but stock splits will change this calculation.
Adjusting the Divisor for Stock Splits
You'll then need to adjust the divisor for stock splits. Start by dividing the closing price of the split stock on the day immediately before the split by the split number. In the example, if stock XYZ incurred a 2-for-1 split the day after you computed your average, you would divide $60 by 2 to get a split price of $30.
Add this new price to the other stock prices. In the example, $30 plus $20 gives you a new numerator of $50. Divide this value by the price-weighted average, computed on the day immediately before the stock split. In the example, $50 divided by $40 gives you a new divisor of 1.25. Use this new divisor in the price-weighted calculation until another one of the indexed stocks split, at which time you need to repeat the calculation to derive an updated divisor.
C. Taylor embarked on a professional writing career in 2009 and frequently writes about technology, science, business, finance, martial arts and the great outdoors. He writes for both online and offline publications, including the Journal of Asian Martial Arts, Samsung, Radio Shack, Motley Fool, Chron, Synonym and more. He received a Master of Science degree in wildlife biology from Clemson University and a Bachelor of Arts in biological sciences at College of Charleston. He also holds minors in statistics, physics and visual arts.