logo
Sign in or Register

Already a member?

Sign in

Or sign in with your account on:

Not a member yet?

Register
    

 


Has the Dow Jones Industrial Average Become Irrelevant?

By  +Follow June 27, 2013 3:39PM
Share:
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. To read our full disclosure, please go to: http://www.equities.com/disclaimer


Liked What You Read? Join Equities.com as a contributor and get eyeballs on your content FOR FREE!

Results for ^DJI
Multirotor Deals™
29 Aug 15 11:56:34
#gimbal holder cap+lens hood+gimbal saver protector combo for DJI Phantom 3: £19.90 End… http://t.co/rIPfcwACmv http://t.co/vl2ytwPxbl
Alexa Gutierrez
29 Aug 15 11:56:15
RT @DJIGlobal: He sure has a strong core! Great precision flying @Jessewelle #DJI #inspire1 https://t.co/jwdi6TXsfQ
Tobi
29 Aug 15 11:56:12
Ich habe ein @YouTube-Video von @_ilias_b positiv bewertet: http://t.co/EDmoafxXpY DJI Phantom footage! - Ilias B
Tim van Onselen
29 Aug 15 11:56:04
Industrial nature. #dji #djiphantom3 #Holland https://t.co/cn9R5oJNHe
Dronen-Papst
29 Aug 15 11:55:52
10 Gründe bei uns zu kaufen - DJI Inspire 1 kaufen - Dronen-Papst - http://t.co/gHq5WczJ2z 2. Verlässlicher technischer Support von Mon...
Sean♠️Casey
29 Aug 15 11:55:24
RT @RacinJason38: Took the #drone for a lil #flight to see some #fireworks #dji #fly #FlyAway #WhatDoYouMean http://t.co/NIfBZcJ5Ee
Dronen-Papst
29 Aug 15 11:55:22
10 Gründe bei uns zu kaufen - DJI Inspire 1 kaufen - Dronen-Papst - http://t.co/gHq5WczJ2z 8. Sie erhalten Antworten auf Ihre Fragen! O...
Multirotor Deals™
29 Aug 15 11:55:05
#Dji f550 hexcopter taranis 5000mah naza RTF not quadcopter gimble fpv fat shark: £700.00… http://t.co/8gF7s0fv6G http://t.co/sJiNY5ewXj
Dronen-Papst
29 Aug 15 11:54:50
10 Gründe bei uns zu kaufen - DJI Inspire 1 kaufen - Dronen-Papst - http://t.co/gHq5WczJ2z 10. Kundenzufriedenheit (Referenzliste), wir...
jason tucker
29 Aug 15 11:54:20
Took the #drone for a lil #flight to see some #fireworks #dji #fly #FlyAway #WhatDoYouMean http://t.co/NIfBZcJ5Ee
FREE CAMERA
29 Aug 15 11:54:06
#Camera #Art #Photography #8403 DJI Inspire 1 Gimbal & Camera Unit - 4K Video & 12MP Stills - EXMOR 1/2.3" CMOS http://t.co/WoWgfokCKm $…
FREE CAMERA
29 Aug 15 11:54:05
#Camera #Art #Photography #3891 DJI Phantom 3 Professional RTF Aerial Drone Quadcopter w/ 4K Camera - OPEN BOX http://t.co/SXLfOvlrET $1…
FREE CAMERA
29 Aug 15 11:54:04
#Camera #Art #Photography #2778 New DJI Inspire 1 RC Drone GPS 720p HD Quadcopter w/ 4K Camera & 3-Axis Gimbal http://t.co/mQjCMGWixV $2…
FREE CAMERA
29 Aug 15 11:54:03
#Camera #Art #Photography #6045 DJI Inspire 1 HARVEST NDVI Drone with 4K Camera http://t.co/BdObfIDiep $4,759.00 End Date: Wednesday Sep…
S Riches
29 Aug 15 11:54:02
Check out Newy's Capture the Action Giveaway where you could win a DJI Drone - I entered here! http://t.co/pClfkMS9zI http://t.co/pClfkMS9zI
FREE CAMERA
29 Aug 15 11:54:02
#Camera #Art #Photography #2746 DJI Phantom 3 Professional 4K Video 12MP Camera Pro Quad GPS Drone Dslr Gimbal http://t.co/Xjs065DQxq $1…
FREE CAMERA
29 Aug 15 11:54:01
#Camera #Art #Photography #6889 DJI Phantom 2 with Zenmuse H3-3D Camera Gimbal GPS RC Quadcopter Aerial Video http://t.co/g8epqXJAdY $85…
Helena Hua
29 Aug 15 11:53:32
песня 3 джи скачать http://t.co/DEl0lWy2XC
Multirotor Deals™
29 Aug 15 11:53:10
#DJI Zenmuse H4-3D Camera Bracket + other parts: $24.95 End Date: Tuesday Sep-8-2015… http://t.co/ErkbNTcLuZ http://t.co/0dECER4wYx
Multirotor Deals™
29 Aug 15 11:53:08
#DJI Inspire 1 Remote - Brand NEW In Box: $359.00 (0 Bids) End Date: Saturday Aug-29-2015… http://t.co/eYinH0o5V9 http://t.co/Unno16Qkgn
Multirotor Deals™
29 Aug 15 11:53:07
#DJI Phantom 2 Vision + Quadcopter Remote Controller - NPVT581: $94.05 End Date: Tuesday… http://t.co/MhqsAu5Pfu http://t.co/ACyEJefch4
luckypete
29 Aug 15 11:52:46
I will probably switch from $DAX to $DJI in the week after next, If you see me sitting on a trade against you DESIST, I will take your money
opulent deal
29 Aug 15 11:52:28
DJI Phantom 2 Vision + Quadcopter Remote Controller - NPVT581 http://t.co/wAWFpM0a5Z http://t.co/c3pTI3u1X3
Nick Simpson
29 Aug 15 11:52:24
RT @Dronepedia: #drones #quadcopter #drohne #multikopter #quadkopter #hubsan #walker #parrot #dji #djiphantom #fliegen# flying http://t.co/…
Nick Simpson
29 Aug 15 11:51:59
RT @Dronepedia: #drones #quadcopter #drohne #multikopter #quadkopter #hubsan #walker #parrot #dji #djiphantom #fliegen# flying http://t.co/…
Multirotor Deals™
29 Aug 15 11:51:07
#Car Charger Adapter Fr DJI Phantom 3 Professional Battery Quadcopter Accessories: £8.93 End… http://t.co/Y4Df2y0hdI http://t.co/WzRo9vGEOW
Ali Akbatu
29 Aug 15 11:50:44
#5: Genuine DJI Inspire 1 Part 55 Battery Charging Hub for Multi Smart Battery Charging (Compatible With Both ... http://t.co/IKTFa04iHS
DJI Forums
29 Aug 15 11:49:54
RT @Tabletolic: Genuine DJI Inspire 1 Part 55 Battery Charging Hub for Multi Smart Battery Charging (Compatible With Both Inspire 1… http:/…
Fotomondeo
29 Aug 15 11:48:42
Cardiff Bay by Drone. #drone #aerialphotography #cardiff #wales #uas #uav #cardiffbay #dji #gopro #drones http://t.co/MP9iVmuydR
UK Drone Sales
29 Aug 15 11:48:03
For Sale: Dji f550 hexcopter taranis 5000mah naza RTF not quadcopter gimble… http://t.co/NeDoozb9WS #uk #drone #drones #uav #uavs #aviation
Ron Loewen
29 Aug 15 11:48:02
RT @DajinDJI: Dajin Expands Alkali Lake Lithium Project: http://t.co/sJdIDx53qg $DJIFF $DJI.V #Lithium http://t.co/01BLzaUlyC
Silvia Estela Diana
29 Aug 15 11:47:47
RT @dronoblog: Time to fly! #dji #djiphantom #phantom3 #p3p #drone #drones #uav #dronebois #droneoftheday… http://t.co/LlJObqJtdT http://t.…
View Android
29 Aug 15 11:47:33
Android Project Titles 2014 , Android Project Ieee Papers Download , Android Ieee Projects… http://t.co/rMq9TOMCkf http://t.co/B356EAYtLZ
Bula
29 Aug 15 11:47:28
IcemoonRecords: Icemoon - Kefalos 2012 - Intro: http://t.co/B5ph8CTrD5 | #EDM #BeachParty #Event #HouseMusic #Dubstep #Concept #Kos | dji…
Multirotor Deals™
29 Aug 15 11:47:09
#Dji inspire 1 remote controller: $525.00 End Date: Saturday Sep-5-2015 11:07:28 PDT Buy It… http://t.co/EIEcfxylct http://t.co/OSodukEXs4
Multirotor Deals™
29 Aug 15 11:47:08
#Naze32 CC3d micro APM mount with OSD tray ZMR QAV 250 DJI F450 TAROT TBS disco: $5.00 End… http://t.co/WM9mwdBIqK http://t.co/OFPS1S7eer
StoningtonRealEstate
29 Aug 15 11:46:38
RT @Realty3CT: The DJI Phantom 3 Professional Is The Easiest Drone I’ve Ever Flown http://t.co/7jqEIXpRVW via @techcrunch
Multirotor Deals™
29 Aug 15 11:45:07
#DJI Phantom 2 Quad-Copter Drone: $1,150.00 (0 Bids) End Date: Saturday Sep-5-2015 11:07:30… http://t.co/FmGvR2IFJe http://t.co/lGSIrnB6C2
Multirotor Deals™
29 Aug 15 11:45:06
#DJI F450 ARF Flame Wheel w/Naza M V2 No GPS w/LED Module w/E305 Propulsion Kit: $399.95 End… http://t.co/uHatyMgjNZ http://t.co/5c5NCO97ap
Amazing Deals USA™
29 Aug 15 11:44:14
#New DJI Phantom 2 Vision+ Plus VERSION 3 Quadcopter Drone w/ FPV 1080p WIFI Cam: $1079.00… http://t.co/KLYSdsznJd http://t.co/oZwj5vZe9e
Udrones
29 Aug 15 11:43:59
RT @dronoblog: Time to fly! #dji #djiphantom #phantom3 #p3p #drone #drones #uav #dronebois #droneoftheday… http://t.co/LlJObqJtdT http://t.…
Emelyne
29 Aug 15 11:43:37
RT @Anderson__Sbc: @EmelyneOln les gens la sont dji tkt
Ilias
29 Aug 15 11:43:11
RT @TheSimlutt: Ich habe ein @YouTube-Video von @_ilias_b positiv bewertet: http://t.co/gFEA1PpqyV DJI Phantom footage! - Ilias B
siɱσก
29 Aug 15 11:42:53
Ich habe ein @YouTube-Video von @_ilias_b positiv bewertet: http://t.co/gFEA1PpqyV DJI Phantom footage! - Ilias B
hrvoje molnar
29 Aug 15 11:42:50
DJI PHANTOM 3 ADVANCED GIVEAWAY http://t.co/LxycdmyWHl #1000subscribergiveaway #djiphantom3
bride film
29 Aug 15 11:42:43
We had a blast with motorboatin30a !! #drone #dji #watersports #aerial @rosemary_beach #Repost… https://t.co/Yvye9ptdt4
savage diboula
29 Aug 15 11:42:09
@EmelyneOln les gens la sont dji tkt
я ща'23 до др
29 Aug 15 11:41:48
#RT если 1 #FAV 2 http://t.co/fPUPxk8nUI
UK Drone Sales
29 Aug 15 11:41:34
For Sale: DJI F450 Naza Lite Phantom 2 E300 Esc FPV… http://t.co/28GOqkffAf #uk #drone #drones #uav #uavs #aviation http://t.co/DqlQFAM5wJ
Multirotor Deals™
29 Aug 15 11:41:15
#DJI Intelligent Flight Battery for Phantom 3 (CP.PT.000161): $149.00 End Date: Saturday… http://t.co/eo4pounSgJ http://t.co/bcvNFeMiIc
				
				
By  +Follow June 27, 2013 3:39PM
Share:

Comments

 

blog comments powered by Disqus

 Today's Must Reads

Welcome to Equities.com's Small-Cap Throwdown


These Analysts Called Apple's (AAPL) Collapse, Here's What They're Saying Now

7 Dow Stocks Worth Owning and a Lot that Aren't

Sprint Turnaround Has Begun


Saving the

Small-Cap Market

 

Small-cap stocks offer investors many benefits, ranging from higher growth potential to overlooked value opportuni... in Equities.com's Hangs on LockerDome

About us

Equities.com is an advanced financial data portal and social network designed to connect self-directed investors with the world’s most innovative startup and small cap companies. Through our in-depth coverage of small cap markets, comprehensive research and stock valuation reports, state of the art issuer products, and world class events, Equities.com provides the social tools and insight that drive tomorrow’s investment relationships and opportunities.

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

Login or Register

LOG IN