Sign in or Register

Already a member?

Sign in

Or sign in with your account on:

Not a member yet?


Has the Dow Jones Industrial Average Become Irrelevant?

By  +Follow June 27, 2013 3:39PM
Tickers Mentioned:

Charles Henry DowFounded by Charles Dow in 1896, the Dow Jones Industrial Average follows the price performance of 30 large, publically traded American companies. Since its creation, the Dow has served as one of the world’s most acknowledged financial indices, and is commonly displayed on the front page of newspapers and financial websites worldwide.                              

From industrials to technology and financials to retailers, the Dow is designed to represent a complete, well-balanced picture of how American large-cap stocks perform on a given day. The current list of Dow holdings can be found here, courtesy of CNN.

While the Dow’s longevity is indicative of its historical effectiveness and importance, many of its methods are antiquated in today’s day and age. The following information is intended to explain how the Dow Jones Industrial Average works and why it may need an overhaul.

The Dow’s System of Weights

The amount of weight that one company carries in the Dow is determined by the price of its stock. While the formula can get convoluted with stock splits and dividend payments, individual stock prices remain the primary determinant of index weight. For instance, a $100 stock carries 10 times more value than a $10 stock, regardless of value or relative importance of the two companies.

Given the weights of these five Dow stocks, it’s easy to see why this system has drawn heavy criticism over the years.

DJIA Weighting


Although IBM (IBM) is worth 25 percent less than Microsoft (MSFT), it carries six times more weight. As a result, IBM carries enough weight to singlehandedly move the index with a significant price movement, while Microsoft, a more valuable and equally relevant company, is negligible.

Meanwhile, Alcoa (AA) and Bank of America (BAC) both hold weights of around 0.5 percent, although Bank of America is worth approximately 17 times more.

This price-weighting system also means that $1 changes in Bank of America and a $1 change in IBM moves the Dow by the same amount. However, in reality, a $1 price increase in Bank of America creates $10 billion in market value, which is 10 times more than a $1 change in IBM. Perhaps this illogicality means that it’s time for the Dow to follow in the footsteps of the S&P 500 and Nasdaq, which use market capitalizations to determine stock weights.

The Stocks in the Dow

One of the Dow’s strengths is its broad range of stock components. The Dow has just about everything: healthcare providers, automakers, financials, retailers, tech companies, utilities, and so on.

What the Dow lacks, however, is four of America’s most influential and valuable companies – Apple (AAPL), Google (GOOG), Amazon (AMZN) and Berkshire Hathaway (BRK.A).

Although all four companies are worthy of becoming Dow components, the price-weighting model sparks complications. Apple would account for almost 20 percent of the Dow, Google 40 percent, and Amazon 13 percent. Berkshire Hathaway’s $169,000 stock price would make up almost the entire index.

This is an obvious shortcoming because these companies are too important not to include in the world’s most popular large cap index. Apple, Google, and Amazon are perhaps the greatest innovators of the last decade and are among the world’s largest revenue earners, yet they have no plans to join the Dow.

Leaving America’s greatest innovators and largest companies out substantiates the index as incomplete. The Dow is known as a large cap index, yet its model ironically omits America’s largest companies.                                                                                         

History vs. Reason

With all of its shortcomings and inconsistencies, why does the Dow remain so highly regarded?  Nicholas Colas, chief market strategist at ConvergEx, told Fox Business in January that fascination with the Dow starts and ends with history.

“The Dow has one existential advantage: it’s the oldest. Before the Federal Reserve existed you had a Dow Jones Industrial Average,” said Colas.  “There’s actual value to that. If you want to understand how stocks traded in the Depression, you’ve got one choice and it’s the Dow.”

Jamie Farmer, managing director of S&P Dow Jones Indices, agrees with Colas. “Extensive history allows for a referential touchstone. We’ve got so much history, the actual number we see provides a great deal of value. We know intuitively where the (Dow’s) number is.”

Although the Dow certainly has a rich history, it’s obvious that the index has lost some of its relevancy and needs to make significant adjustments to its pricing-weighting model.  Until that day arrives, investors would be prudent to actively follow the market cap-weighted S&P 500 instead of the Dow to gage market activity.

People have grown used to the Dow dominating financial headlines, but the index just is no longer relevant enough to warrant its current level of financial attention.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.

Signup for our daily newsletter and get our best articles emailed right to you!

Results for ^DJI
23 Oct 14 18:23:36
@1It_xxj ははは笑 裏まで来た位だ。 成る程。そう言えば、そうだな。 静かか。 おはよう、司。
23 Oct 14 18:23:15
DOKIA OFFERS > http://t.co/1pave33gIN #74320 Black Protective Aluminium Carrying Case For DJI Vision+ / Vision ... http://t.co/geiv2oWYRN
23 Oct 14 18:23:08
@s_dji そーくん おれは、るうし。
23 Oct 14 18:22:32
@ru_si_heart 俺はそうま、と読むよ。 呼びやすいように呼んでくれ。
Ryan Ninja
23 Oct 14 18:22:24
@DJIGlobal DJI 540 #ghost http://t.co/yUIB7dI4ag
23 Oct 14 18:22:18
#Deals #538 http://t.co/Qq8yzhpXXe DJI Phantom FC40 RC RTF Drone Quadcopter WiFi Camera GPS 2 UAV Aerial Vision... http://t.co/BcO2f6kEn1
23 Oct 14 18:21:55
@Asahi_snm 何であれもこれもとトッピングしたがるんだろうな?笑 これは秀でてるが、これは劣ってる、とか普通で良いと思うけど。
23 Oct 14 18:21:33
Deals : http://t.co/buOScC33C1 #86593 Camouflage Shoulder Bag Quadcopter Backpack for DJI Phantom 1 / 2 Vision,... http://t.co/E83KyOzeGy
23 Oct 14 18:21:31
Deals : http://t.co/BPE6b6Eogi #86593 Rugged Hard Carrying Case Backpack For QX350, DJI Phantom 1/2,version2+,F... http://t.co/VUrahq5owK
23 Oct 14 18:21:30
@s_dji 縁繋ぎどーも。 こちらこそよろしく
23 Oct 14 18:20:44
samsung siap meluncurkan gadget sebesar batang rokok yang diberi nama "dji sam sung"
Дмитрий Ожигаев
23 Oct 14 18:20:06
Рая, мне раньше некогда было, а теперь я вас обожаю!
23 Oct 14 18:19:54
@ru_si_heart お迎えありがとう。 フォロバさせて貰った。 宜しくな。
♔ Long Live $o$a ♔
23 Oct 14 18:19:45
RT @Tayana_Vly: Pli ou si, pli ou laide, pli ou ka ni dji fanm ♬
M. Alvin Malana
23 Oct 14 18:19:37
Bang @barrykusuma kalo bawa dji phantom ke puncak gunung ngrepotin gk bang?
Ayiiiii ❤
23 Oct 14 18:17:04
Pli ou si pli ou lèd pli ou ka ni dji fanm .. 🎶
Best Deals
23 Oct 14 18:16:43
Deals #1924 http://t.co/ODQ3ZBi286 Black Protective Aluminium Carrying Case For DJI Vision+ / Vision / Phantom ... http://t.co/2RoHsFbThh
(͡° ͜ʖ ͡°)
23 Oct 14 18:15:50
RT @levilain_972: Pli ou si, pli ou laid, pli ou ka ni dji fanm! Mwen descenn 🎶
Cedrick ! - DAANM²
23 Oct 14 18:14:03
Atchelman pli ou si pli ou laid , Pli ou ni Dji fanm #SaVré
.†.Son Biscuit.★.❤️
23 Oct 14 18:11:23
Pli ou si, pli ou lèd et pli ou ni dji fanm .. man désen !!
No defeat.
23 Oct 14 18:11:23
RT @William_Carter_: Pli si pli ou laide pli ou ka ni dji fanm
★Au Pire Des K ★
23 Oct 14 18:11:21
Pli ou si, pli ou laid, pli ou ka ni dji fanm! Mwen descenn 🎶
Elle me hante ☆
23 Oct 14 18:11:17
Pli ou si, pli ou laide, pli ou ka ni dji fanm ♬
Sheguey Carter
23 Oct 14 18:11:08
Pli si pli ou laide pli ou ka ni dji fanm
23 Oct 14 18:11:00
Priceless material for continual profit in the #stock #market http://t.co/yNJXyeGQ8u $SPX $DJI $RUT $NDX $AAPL $FB $TWTR $LNKD $TSLA $GS $V
23 Oct 14 18:10:10
http://t.co/4br9GfaVQW #Deals #0112 Black Protective Aluminium Carrying Case For DJI Vision+ / Vision / Phantom... http://t.co/W0tFW95J7p
23 Oct 14 18:09:10
RT @tradingonfire: Eastern Markets open and $DJI futures scream downward. Head and Shoulders with horrible downward sloping neckline suppo…
23 Oct 14 18:07:10
Best Videos for Learning to Set-Up and Fly Your @DJIGlobal Phantom - http://t.co/aCytbnQJ3C #drones
Peter Wong
23 Oct 14 18:05:32
🌎 SOS PLEASE HELP‼ CROWD FUNDING 4⃣ #GREECE SUICIDES ➡ http://t.co/d9rcFvlbe8 #CZE #COD #PRK #DNK #DJI #GCCB2014 http://t.co/y6vuasM5wO
23 Oct 14 18:05:10
Deals : DJI iOSD Mini On Screen Display for Autopilot System http://t.co/sRvCCo13DL #7129 $68.99   $79.99   (5... http://t.co/MfzgLCShL6
23 Oct 14 18:05:09
Deals : Black Protective Aluminium Carrying Case For DJI Vision+ / Vision / Phantom 2 http://t.co/IFzlKYtS65 #7... http://t.co/DvY3hFdj26
23 Oct 14 18:05:03
Deals : Original New Shoulder Bag Carrying Case Backpack For DJI Phantom1/2,Vision2,FC40 http://t.co/8Wd9hqqCjK... http://t.co/rufDNxdfFL
Buy Now
23 Oct 14 18:03:52
DEALS : http://t.co/aTcZp8yXMs #8911 ALL-Black Shoulder Carrying Case Box Backpack For DJI Phantom 1/2,Vision 2... http://t.co/I6qCBiTs6k
Green Deals
23 Oct 14 18:03:36
Offers : http://t.co/cD791DXTZH #8392 ALL-Black Shoulder Carrying Case Box Backpack For DJI Phantom 1/2,Vision ... http://t.co/LQnf74sTTn
Son Of The Sun
23 Oct 14 18:00:59
@donlayee Ah waa dji daal... Moo ngui noonu rek.
23 Oct 14 18:00:36
It's here!!! 😱 #dji #gimbal #ronin #steady #timetofilm http://t.co/MbX8BHsJg6
Дмитрий Ожигаев
23 Oct 14 18:00:25
csrolling в CSS http://t.co/MnHG5MV0Db
Дмитрий Ожигаев
23 Oct 14 18:00:14
Россия способна вынести любые поражения, но побежденной ей не бывать. И нет такой силы, чтобы сломить ратный дух русского человека.
23 Oct 14 18:00:01
Back in stock: T-Motor 9x3 Carbon Fiber Props for DJI Phantom Upgrade, both Gloss Black and Gloss White, for... http://t.co/r7FH19LFVK
Carlos A Cabal
23 Oct 14 17:59:59
I liked a @YouTube video http://t.co/YA2qqjsAY3 South Dakota Harvest 2013, John Deere, DJI Phantom, GoPro
Zachary Brethauer
23 Oct 14 17:59:56
Eastern Markets open and $DJI futures scream downward. Head and Shoulders with horrible downward sloping neckline supporting for now.
23 Oct 14 17:59:42
Group Deals : http://t.co/iDp0AJ3vWv #29143 Quadcopter Universal Shoulder Bag Backpack for DJI Phantom 1 / 2 Vi... http://t.co/6XC6SkgNU5
23 Oct 14 17:59:39
Group Deals : http://t.co/LUzD2Be6Ow #29143 DJI iOSD Mini On Screen Display for Autopilot System $68.99   $79.... http://t.co/ZfgejtA3Bj
23 Oct 14 17:57:55
Ma grande soeur diamono dji momeu teré siiw . Straordinaire .
DJI Forums
23 Oct 14 17:57:37
RT @Satoshidj: Ready at #costadeleste #panama #Aip #footballamericano #dji #f550 #hexacopter @migdalia507 @satoshidj… http://t.co/HPNXkSzgpO
23 Oct 14 17:54:33
23 Oct 14 17:51:22
Tps yi da niouy woté rér mani sour na souma démé ba khadjou goudi khiff dapp meu ma mél ni dji akh si birr wagn bi ! #TamLouBonne
23 Oct 14 17:50:19
DEALS OF THE DAY : http://t.co/1SDpnNehEh #671 Quadcopter Universal Shoulder Bag Backpack for DJI Phantom 1 / 2... http://t.co/ZYj6JiK9fI
23 Oct 14 17:50:17
DEALS OF THE DAY : http://t.co/0aW8tfxWM3 #671 DJI iOSD Mini On Screen Display for Autopilot System $68.99   $... http://t.co/mpHogv4yVv
John Paulo Salamat
23 Oct 14 17:49:57
I liked a @YouTube video http://t.co/XM6r9qp6tA The Camera Store Tour 2014 - DJI Ronin Test
By  +Follow June 27, 2013 3:39PM



blog comments powered by Disqus

About us

Equities.com is the most advanced interactive online social ecosystem for the financial industry, serving as a resource center and next-generation communication platform that connects self-directed investors with public issuers, market experts, and professional service providers and vendors. Registered members can leverage our exclusive proprietary research tools such as the Small-Cap Stars, which outperformed 90% of all small-cap mutual funds, and robust do-it-yourself E.V.A. research reports. The Equities.com Issuer Dashboard is the ideal tool to communicate and manage investor awareness campaigns to the investment community, as well as to access valuable resources to help your company grow.

Market Data powered by QuoteMedia.
Copyright © QuoteMedia. Data delayed 15 minutes unless otherwise indicated. Terms of Use.