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The DJIA is a dinosaur and irrelevant. Its price-weighted because that was easier to calculate than a market-cap weighted fund when the thing was created ~140 y
by anonu 2y ago
The DJIA is a dinosaur and irrelevant. Its price-weighted because that was easier to calculate than a market-cap weighted fund when the thing was created ~140 years ago. Which means that high dollar value stocks have more weight in the index which doesn't really make sense.
But worse, how we talk about the index, even today on radio and TV, in terms of nominal points up or down is completely ridiculous. Just yesterday "the Dow Jones was up 100 points". Ok - no reference value, no percentage change: means nothing to me. And we wonder why we are financially illiterate in this country.
- bluGill 2y agoThe dow was useful in pre computer times when a reborter could calculate it every few minutes. The s&p500 Is a better indicator but that took hours by hand and so was only done overnight. now that we have computers and index you want can be done in milliseconds and so the dow needs to die.
- makeitdouble 2y agoIn this day and age we could skip all of that and report on the actual average of all the stocks in the exchange, instead of only a fraction.
- david-gpu 2y agoSP500 represents something like 85% of market capitalization. Adding a few more thousand stocks would make little difference, especially when you consider how heavily correlated they are. Just compare SPY with VT -- nearly the same thing.
- devoutsalsa 2y agoYou just described a total market fund like VTI :)
- e_y_ 2y agoAs I understand it, they don't own every stock. Right now VTI has about 3700 stocks out of the ~4300 on US publicly traded markets (excluding OTC). But it's more representative than the S&P 500 and similar.
- devoutsalsa 2y agoThat's right. Some extremely small companies and stocks don't meet certain liquidity or trading requirements.
- bluGill 2y agoThat may not be what you want. Fortuantly computers can calculate the mix you want. mostly traders care about the stoks they follow they just want someeindication if the unexpected movement they are seeing is the market or something they don't know.
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- stackghost 2y agoI agree that nowadays the Dow is somewhat obsolete, but: The DJIA is not meant to be viewed in isolation but in the context of other indexes like DJTA, the idea being that if industrial companies are doing well but the railroads or shipping aren't, it will be reflected in those respective averages diverging, hinting at deeper economic problems. Also they adjust for stock splits now.
- JJMcJ 2y agoMost news reports also give the percentage change as well as the point difference. That began about 20 years ago.
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- ninth_ant 2y agoEven with this objective, using the share prices and not the market cap of the companies involved creates enormous skew. For example UNH and especially GS take up the largest individual components despite not being being amongst the largest companies, giving their share movement disproportionate weight in the “index”. Perhaps it made sense 140 years ago but today it belongs in the rubbish.
- ywvcbk 2y ago> that if industrial companies are doing well Except it might be very hard to tell that because it’s effectively randomly weighted. Caterpillar almost has the same weight as MS and double that of Amazon.
- EVa5I7bHFq9mnYK 2y agoMaybe splits and reverse splits weren't a thing back then, so price really meant something?
- manojlds 2y agoHow is the second point anything to do with DJIA and this news?
- hanklazard 2y agore: up XX number of points, I haven't bothered for many years, but that sounds like NPR's "All Things Considered" or "Marketplace". Always drove me nuts too and does nothing to help people understand financial markets.
- jacobjjacob 2y agoEveryone reports it this way. It used to bother me, but I think it does provide some interesting information vs the % day-to-day. Because % is relative to the previous day, number of points isn’t. Personally I prefer the %
- pjfin123 2y agoAnother advantage of a price-weighted stock index is that it's easier to track with a real portfolio because they don't need to rebalance as frequently. To replicate the performance of the DJIA you just have to buy one share of each stock and hold them, you only need to place trades when a company is added or removed from the index. With a market cap weighted index you have to make more frequent trades every time a company does a buyback or issues new shares.
- anonu 2y ago> you only need to place trades when a company is added or removed from the index. Not true for a price-weighted index. If there is a stock-split, the price will change as will the weighting. AAPL split in August 2020 4 for 1. It was 11% in the DJIA before the split - and close to $500 stock price. Post-split, all DJIA tracking funds had to sell AAPL as it probably went down to 2.5% weight. Consequently, all other stocks in the DJIA were to buy. Luckily, there aren't too many dollars tracking the DJIA. > With a market cap weighted index you have to make more frequent trades every time a company does a buyback or issues new shares. It depends. If the index is free-float market-cap weighting then yes, there will typically be a free-float adjustment at each rebalance (typically quarterly). But if there's no free-float adjustment then you need not do anything. Though managing a fund that tracks a free-float weighted index is not really an issue - there's some operational work to do on each rebalance.
- ywvcbk 2y ago> To replicate the performance of the DJIA Why would you want to though? The ratios are entirely random.
- pjfin123 2y agoThe goal of passive investing is to participate in the stock market while not actively picking stocks. So you're already investing in stocks kind of randomly.
- pjfin123 2y ago> Just yesterday "the Dow Jones was up 100 points". Ok - no reference value, no percentage change: means nothing to me. This always really bugged me