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 and Connect With Your Favorite Financial Experts FOR FREE! Members of Equities.com gain access to our leading financial news and content, active social investment community, proprietary research tools including the 2014 Small-Cap Stars, E.V.A. reports and more.

Results for ^DJI
hoplasd_gi4k
4 Jul 15 15:32:06
#Camera #5328 DJI Phantom 3 Pro Professional FPV Drone 4K Camera & 3-Axis Gimbal w/TWO BATTS!! … http://t.co/qd4ZAUj1uE
THE BEST DEAL
4 Jul 15 15:32:06
#2477 DJI Inspire 1 Quadcopter with 4K Camera and 3-Axis Gimbal + Sandisk 32gb Bundle http://t.co/VnLNvG0ydc $2,… http://t.co/kq4ah4CN6S
THE BEST DEAL
4 Jul 15 15:32:01
#3130 DJI Phantom 2 Vision+ Plus v3.0 QuadCopter PV331 5.8 GHz w/ WiFi 1080p Camera http://t.co/mJs98EZkw1 $699.… http://t.co/igUQsOmx2e
hoplasd_gi4k
4 Jul 15 15:32:01
#Camera #4455 DJI Phantom 3 Professional vision 4K 12 Megapixel Photo HD Camera + 2nd. BATTERY … http://t.co/zTawBSSiyG
THE BEST DEAL
4 Jul 15 15:31:59
#7220 DJI INSPIRE 1 Quadcopter Drone w/ 4K HD Camera, DUAL 2x remotes and free case http://t.co/10r4CdYXDb $3,39… http://t.co/3PFQxPKHYl
hoplasd_gi4k
4 Jul 15 15:31:59
#Camera #6614 DJI Phantom 3 Advanced Camera Drone http://t.co/23AxUSf8UY $999.00 End Date: Saturday Aug-1-2015 1… http://t.co/4yypNLXpTo
THE BEST DEAL
4 Jul 15 15:31:58
#8298 DJI Inspire 1 Drone Quadcopter w/ 1 Remote Control, 3-Axis Gimbal http://t.co/szqc4xLVFl $2,899.00 End Dat… http://t.co/XrwFtuDE5g
Marc Nichols Jr
4 Jul 15 15:31:58
I liked a @YouTube video from @micbergsma http://t.co/TSWusd8P6s MicBergsma's DJI Phantom Camera Settings for Fireworks
Mendes
4 Jul 15 15:30:15
Q vontade dji chora e dji me atirar
♥SA'nınBeyinCerrahı♥
4 Jul 15 15:29:43
Oguzhan koc fanlarina sinirlendikten sonra annem sakin ol kızım diyince ben dji https://t.co/mrmaehiGaA
kenneth rodger
4 Jul 15 15:29:23
I liked a @YouTube video http://t.co/nC9rJ1SgjM Dji Phantom FC40
Multirotor Hot Deals
4 Jul 15 15:28:37
eBayUS Dji Inspire One http://t.co/EsqRLe8Y8a http://t.co/vzdL70FMgN
CAMERAS CAMERAS
4 Jul 15 15:28:16
Cameras and Deals : http://t.co/tgbAQ0rpJz DJI Inspire 1 4K HD Camera 3-Axis Gimbal Ligh… http://t.co/JK833FqsMD http://t.co/rWArDzIO2E
Multirotor Hot Deals
4 Jul 15 15:28:05
eBayUK DJI Phantom BC20-4 lipo balance charger http://t.co/lJTHdq3yhP http://t.co/UT6HgQ7Q9k
kenneth rodger
4 Jul 15 15:27:37
I liked a @YouTube video http://t.co/A53l2PxsVp Dji Phantom FC40
Multirotor Hot Deals
4 Jul 15 15:26:05
eBayUS 30A speed controller ESC+1000KV Brushless Motor as DJI FPV drone RC quadcopter F http://t.co/HYijER78mE http://t.co/XONz388smd
Timothy James
4 Jul 15 15:25:21
The DJI Ronin-M is an Amazing Stabilizer That is Unrivaled in Ease of Use http://t.co/mltN1De5So #photography #arts
Multirotor Hot Deals
4 Jul 15 15:24:11
eBayUS 30A speed controller ESC+1400KV Brushless Motor as dJI FPV drone RC quadcopter F http://t.co/zKNhWUwZzM http://t.co/hzywGu8vUT
Kaw
4 Jul 15 15:24:07
@kaisertamsir 😂😂😂 dafey am. Mais diamono dji maa am niarry boy Bachir ak bb. 👌
Dahboo7
4 Jul 15 15:23:59
#BalloonGlow 2015: Amazing #4thofJuly #DJI #Drone Aerials #ConeyIsland #FourthofJuly #Dahboo7 #Ohio... http://t.co/In0EIBFj3T
Jerry McNeill
4 Jul 15 15:23:25
DJI S800 Two Servo Pan Tilt FPV Gimbal Video Camera Mount - FAST FREE SHIPPING FROM Orlando, Florida USA! http://t.co/OZ4T4bftzt
HOT OFFERS
4 Jul 15 15:21:47
#0377 DJI Zenmuse H4-3D Gimbal for GoPro HERO4 Camera #CPZM000145 http://t.co/AXCFxsdapj $299.00 End Date: Satur… http://t.co/Wg1wPOJ2Sj
HOT OFFERS
4 Jul 15 15:21:45
#2988 DJI Zenmuse H3-3D 3-Axis Gimbal for GoPro3, GoPro3+ Camera (Phantom 2 Version) http://t.co/8p3rv9ZltK $290… http://t.co/xVYtTB7Fyo
HOT OFFERS
4 Jul 15 15:21:44
#0808 In stock! New DJI Phantom 3 Advanced RC Quad Drone, HD Camera w/ 3 Axis Gimbal http://t.co/o6daai8LA1 $1,0… http://t.co/oVc2VTmcfn
HOT OFFERS
4 Jul 15 15:21:43
#1505 DJI Inspire 1 Drone Quadcopter w/ Single Remote GPS 3 Axis Gimbal 4K Camera RTF http://t.co/k7DVWPKCfP $2,… http://t.co/a4a4Qy8SiG
HOT OFFERS
4 Jul 15 15:21:42
#2401 NEW DJI T600 Inspire 1 Quadcopter with 4k Video Camera with Controller http://t.co/6uqKftqmel $3,814.87 En… http://t.co/cnDnyaAzEV
Queen.
4 Jul 15 15:21:38
Djiguénne dagn key soutoural OK d'accrord mais djiguène dji bopam parfois moy niakal bopam soutoureu
Lambassadeur DéNegro
4 Jul 15 15:21:06
RT @parisien_fier: @TheClownOfParis ROJO élu homme du match par tous les journalistes sportifs français 😀
nicholas
4 Jul 15 15:20:26
ITrader19: May 6th 2010, $DJI -8.35% flash crash http://t.co/APkFcwmJiE
Jayson Hanes
4 Jul 15 15:20:18
Independence Day Eve, 2015 | DJI Phantom 2 Vision PLUS (P2V+): http://t.co/7T5hiChDn3 via @YouTube
Lambassadeur DéNegro
4 Jul 15 15:20:11
RT @cbmfrocks: #TeamHaiti CB ⭐󾭩 http://t.co/8vUJXLGQQL
Lambassadeur DéNegro
4 Jul 15 15:19:44
RT @TheoryHaiti: #Haiti #Haitian #zoe #Antillais #TeamHaiti #TeamAntilles #TeamAntillais Pour nous l'été ca dure toute l'année #mpakonndou…
Lambassadeur DéNegro
4 Jul 15 15:19:34
RT @MachiBousouk: Entrevue avec les membres de #TeamHaïti - Ça commence bien! - Vidéos - V http://t.co/vfoRT9d9zm
Lambassadeur DéNegro
4 Jul 15 15:19:23
RT @jaspyology: I love my heritage. #TeamHaiti #AyitiCheri
Lambassadeur DéNegro
4 Jul 15 15:19:18
RT @FIERCEGARMENTS: #iLoveHaiti ✊🏾❤️💙 #AyitiCherie #TeamHaiti #WeDemZoes http://t.co/cGdLPnzmUM
Lambassadeur DéNegro
4 Jul 15 15:19:07
RT @promotoken: CLICK http://t.co/2jVDI3WTwB Find out how deep his love really is! #FREE #Astrology report! #haitianpride #365blaze #teamha…
grand products
4 Jul 15 15:18:59
Shoulder Carrying Case Tarot Backpack Bag Quadcopter TL8X015 For DJI S900 X6 X8 http://t.co/YsFMx9zbqg http://t.co/TzakzGcB2l
Lambassadeur DéNegro
4 Jul 15 15:18:58
RT @haitianfreshBSM: Im #TEAMHAITI
Lambassadeur DéNegro
4 Jul 15 15:18:52
RT @frenchwendia: RT @haitianfreshBSM: Im #TEAMHAITI
FREE CAMERA
4 Jul 15 15:18:52
#Camera #Art #Photography #3511 DJI Phantom 3 Advanced Quadcopter 1080p HD Camera and 3-Axis Gimbal New Release http://t.co/LAMjuRJMOX $…
FREE CAMERA
4 Jul 15 15:18:50
#Camera #Art #Photography #1332 DJI Phantom 2 Vision+ V3.0 Quadcopter with FPV HD Video Camera and 3-Axis Gimbal http://t.co/iV7P6dTJGr …
FREE CAMERA
4 Jul 15 15:18:49
#Camera #Art #Photography #3408 DJI Phantom 3 Advanced Camera Drone http://t.co/pYPCv2mMaX $999.00 End Date: Saturday Aug-1-2015 12:23:2…
FREE CAMERA
4 Jul 15 15:18:49
#Camera #Art #Photography #3440 DJI Phantom 2+ H4-3D Gimbal with Gopro Hero4 Black Camera with Extra Battery http://t.co/isdqQe45SG $1,2…
FREE CAMERA
4 Jul 15 15:18:48
#Camera #Art #Photography #5179 DJI Phantom 2 Vision Quadcopter GPS UAV DRONE + HIGH END HD CAMERA 14 Megapixels http://t.co/5Bcz9yVvyx …
FREE CAMERA
4 Jul 15 15:18:48
#Camera #Art #Photography #8386 DJI Phantom 2 with Zenmuse H3-3D Camera Gimbal GPS RC Quadcopter Aerial Video http://t.co/g8epqXJAdY $85…
Lambassadeur DéNegro
4 Jul 15 15:18:46
RT @cbmfrocks: Rate this Hottest 1-100? #TeamHaiti #TurnupFriday CB󾭩⭐ http://t.co/FRtUCGHGnz
Irvin Cst
4 Jul 15 15:18:38
May 6th 2010, $DJI -8.35% flash crash http://t.co/FvSycpTLgs
Lambassadeur DéNegro
4 Jul 15 15:18:38
RT @NatDaTruth: #teamdr vs #teamhaiti
Lambassadeur DéNegro
4 Jul 15 15:18:26
RT @Zouk247Live: CLICK http://t.co/qU3lUROReh Get a FREE quote for Live DJ and Sound System! #haitianpride #365blaze #teamhaiti #zouk #komp…
Lambassadeur DéNegro
4 Jul 15 15:18:20
RT @ajeanbaptiste92: Touchdown in Dallas. ✈ #GoldCup2015 #TeamHaiti http://t.co/kTOMx5calv
				
				
By  +Follow June 27, 2013 3:39PM
Share:

Comments

 

blog comments powered by Disqus

 

 Today's Must Reads

Microsegmentation: The Future of Cybersecurity?


How this Playboy Playmate Became a Better Stock Trader Than You

Long Term Rates Are On The Up…What’s Next?

The Modern Web: So Many Ways to Invest in Wireless Mobile Stocks

It's Time for the Rest of the Country to Legalize Weed

 

Do you expect a 10% correction by the end of 2015? in Equities.com Polls 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