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How Each Stock Affects the Dow’s Performance
By JLP | October 27, 2008
Here’s a quick illustration of how the Dow Jones Industrial Average is calculated.
Below is a table with all thirty stocks in the Dow Jones Industrial Average. The fourth column shows each stock’s daily price change. The last column show’s each stock’s impact on the Dow’s performance, which is found by dividing the price change by the divisor in the fifth column.
Now, before we get a bunch of comments telling us what a bad index the Dow is: I already know that! I just wanted to illustrate how the average is calculated, not critique the index itself.
Topics: Investing | 4 Comments »
October 28th, 2008 at 9:16 am
I definitely agree that the Dow is build on poor math. However, historical charts of the Dow vs the S&P 500 are almost identical. So I don’t think it’s really that big a deal.
October 28th, 2008 at 12:11 pm
Cool post.
Can someone explain to me how the Dow is a ‘bad index’?
October 28th, 2008 at 12:32 pm
Mike–
There may be other reasons but one is that people like to refer to the DJIA when they talk about where the market is moving, and it is not a great measure of that. The DJIA is
1) only 30 stocks– a small sampling
2) not diversified among sectors
3) made up only of very large companies
Basically between the small sample size and lack of diversification both by size and sector, it’s just not a good index to follow for market trends.
Others may have more input, but for this reason I pay a lot more attention to the S&P 500 for large cap stocks and one of several other indices for whole-market or mid- and small-caps.
October 28th, 2008 at 9:47 pm
Indices (and aggregates in general) are neither good nor bad inherently. As long as you recognise the intent behind them and pay attention to their limitation and the methodology behind their construction, then they tend to do their job… The problem always is that people don’t take the time to pay attention to the details (myself included) and get into trouble as a result…