The Dow Jones Industrial Average is what’s known as a stock market index. An index is a group of stocks that are combined to figure out whether the stock market as a whole is going up or down. It is a way to track the performance of the stock market.
The business world has changed a lot since 1896, so the Dow Jones has adapted to keep up. In 1928, the Dow was expanded to include 30 companies instead of just 12. Every few years some of the declining businesses in the Dow Jones are removed and are replaced by businesses that are growing. This helps to ensure that the biggest and most successful companies of the day are always included in the Dow Jones. As of 2021, the Dow includes businesses like Apple (NASDAQ:AAPL), Disney (NYSE:DIS), and Home Depot (NYSE:HD).
The Dow Jones has become one of the most well-known stock market indexes in the world. However, the Dow Jones also has critics that point out two big flaws.
First, the Dow Jones only tracks 30 companies. That’s only a tiny fraction of the 6,000 publicly traded companies that exist in the U.S. alone. Critics argue the Dow Jones does not accurately represent the entire stock market.
Second, the Dow Jones is calculated by using the dollar price of each stock. The Dow Jones ignores the size of each business. This means that a stock that is trading for $100 per share will have 10 times more influence over the Dow Jones than a stock trading at $10 per share.
That’s why the Dow is called a price-weighted index. The dollar price of each stock is what matters, not the size of each business.
To see why some investors think that this is a problem, let’s review the stock price from two Dow Jones stocks—McDonald’s (NYSE:MCD) and Intel (NASDAQ:INTC)—in October 2020:
The business world has changed a lot since 1896, so the Dow Jones has adapted to keep up. In 1928, the Dow was expanded to include 30 companies instead of just 12. Every few years some of the declining businesses in the Dow Jones are removed and are replaced by businesses that are growing. This helps to ensure that the biggest and most successful companies of the day are always included in the Dow Jones. As of 2021, the Dow includes businesses like Apple (NASDAQ:AAPL), Disney (NYSE:DIS), and Home Depot (NYSE:HD).
The Dow Jones has become one of the most well-known stock market indexes in the world. However, the Dow Jones also has critics that point out two big flaws.
First, the Dow Jones only tracks 30 companies. That’s only a tiny fraction of the 6,000 publicly traded companies that exist in the U.S. alone. Critics argue the Dow Jones does not accurately represent the entire stock market.
Second, the Dow Jones is calculated by using the dollar price of each stock. The Dow Jones ignores the size of each business. This means that a stock that is trading for $100 per share will have 10 times more influence over the Dow Jones than a stock trading at $10 per share.
That’s why the Dow is called a price-weighted index. The dollar price of each stock is what matters, not the size of each business.
To see why some investors think that this is a problem, let’s review the stock price from two Dow Jones stocks—McDonald’s (NYSE:MCD) and Intel (NASDAQ:INTC)—in October 2020:
- Brian Feroldi, Why Does The Stock Market Go Up?:
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