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The Dow is a ridiculous stock index. It doesn't adjust for inflation, and - more importantly - just looks at the stock price, not the underlying market cap. So
by lode 12y ago
The Dow is a ridiculous stock index. It doesn't adjust for inflation, and - more importantly - just looks at the stock price, not the underlying market cap. So if Caterpillar (market cap
49.44B) rises 5$ from 80 to 85, the Dow rises 32 points. If Exxon Mobil (market cap 362 Billion) rises from 86 to 91, the Dow rises the same 32 points, even though the first rise means CAT grew only in 3,3 billion Market cap, while XOM grew 20,95 Billion.
NPR's Planet Money has a great episode on the DJI: http://www.npr.org/blogs/money/2013/03/12/174139347/episode-443-dont-believe-the-hype http://www.npr.org/blogs/money/2013/03/12/174139347/episode-...
- stygiansonic 12y agoAgreed - a price-weighted index like the DJIA doesn't make much sense for describing the aggregate behaviour of the constituents, even if it does attempt to adjust for stock splits. A market-cap weighted index like the S&P 500 is probably a better measure.
- aganders3 12y agoI don't know much about this, but I looked them up and it's interesting how well the two compare: https://www.google.com/finance?q=INDEXSP%3A.INX%2C+INDEXDJX%3A.DJI&ei=LuD5VIrBIauxigKsjIGIDg https://www.google.com/finance?q=INDEXSP%3A.INX%2C+INDEXDJX%...
- parenthesis 12y agoYes, the calculation of the Dow Jones is a complete joke, but, funnily enough, it has tracked the fairly sensibly calculated S&P 500 surprisingly closely over time.
- maaku 12y agoNo, it hasn't. The two diverge greatly over long windows.
- stygiansonic 12y agoThe correlation between SPX and the DJIA will generally be quite high, because sampling 30 stocks (and generally those with the biggest market caps) gives you a good estimate/representation. As a result, over short periods of time, the spread between the two will be relatively small. Over long periods of time however, the spread can be significant. See the following: 1. http://avondaleam.com/dow-jones-vs-sp/ http://avondaleam.com/dow-jones-vs-sp/ 2. http://www.thumbcharts.com/101035/DJIA-vs-S-P-500 http://www.thumbcharts.com/101035/DJIA-vs-S-P-500 (Compare 1, 2, 3 and 5 years)
- bdcs 12y agoFYI, the S&P500 is weighted by float (market cap available for public trading) and not market cap, per se.
- etrain 12y agoAgreed, but given their differences, the historical correlation between the S&P and the dow is absurd. https://www.google.com/finance?q=INDEXDJX%3A.DJI&ei=Wef5VPmwNsX9sQeQtoEw https://www.google.com/finance?q=INDEXDJX%3A.DJI&ei=Wef5VPmw...
- abrichr 12y agoFixed link: https://www.google.com/finance?q=INDEXDJX%3A.DJI%2C+INDEXSP%3A.INX https://www.google.com/finance?q=INDEXDJX%3A.DJI%2C+INDEXSP%...
- throwawayaway 12y agoare index linked funds linked to other indices?
- bdcs 12y agoUsually S&P500
- throwawayaway 12y agoi suspected that. do you think that would explain the absurd correlation?
- csomar 12y agoI can't upvote this enough. Once I learned about it, it really shocked me about how this is one of the most popular indexes in the world.
- anonu 12y agoIts popular in the media - but it isn't really used as a benchmark. DIA, the Dow Jones Industrial Average ETF has $12bn AUM whereas SPY, the market-cap weighted S&P 500 etf has $189bn AUM... and probably significantly more if you look at all the "passive" money...
- logicallee 12y agoif you buy caterpillar at $80 and sell at $85 you've made 6.25% gain, whereas if you buy exxon mobil at $86 and sell at $91 you've made 5.81% gain. Even though one is a change (to run with your numbers) of $3.3 billion and the other of $20.95 billion. it's just how shares work. This is true regardless of how many shares you bought, and regardless of how many shares were outstanding[1] or the company's market caps. [1] obv other than new issues/splits/etc.
- poikniok 12y agoUh assuming you are serious the parent poster obviously understands this. The point is that it is absurd to have an index where if the total market cap of the tracked companies goes down, the index can go up. This has nothing to do with the returns of buying or selling any particular stock.
- ghshephard 12y agoOne way of looking at the DJIA - If you place $1000 into each of the companies underlying it, the DJIA will reflect your gain/loss in investment. If you tried to weight the index based on the underlying market cap of each of the companies, you wouldn't get a correct assessment of the value of your investment.
- fsk 12y agoThe Dow is price-weighted because it was started before computers. Add 30 prices and divide by adjustment factor is the easiest to calculate. Also, it was the first index, before people realized other methods are more accurate. Now it has to stay that way for backward compatibility.
- gohrt 12y ago> Add 30 prices and divide by adjustment factor is the easiest to calculate. Multiply 30 prices by shares outstanding, and add, is not substantially harder computation to do once a day. > Now it has to stay that way for backward compatibility Changing ATT to AAPL isn't backward compatible. What compatibility is there to maintain? Nothing important depends on the value of the DJIA from before last week.
- fsk 12y agoIt is backward-compatible, because they adjust the divisor to compensate, so that the index value pre-rebalancing is the same as the index value post-rebalancing. If they never adjusted the list of stocks, it would eventually become irrelevant as stocks go bankrupt or are acquired. Only 1 current Dow member was in the index in 1907 (GE), and 4 current Dow members were in the index before 1939 (XOM, PG, DD).