At the time of writing this, the Dow is sitting around 13,000. In 2007, the Dow reached its peak of around 14,000, so we are inching our way back to the top.
But what is the Dow? According to Investopedia:
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA was invented by Charles Dow back in 1896.
So let’s break that down, “price weighted”, according to Investopedia:
A stock index in which each stock influences the index in proportion to its price per share. The value of the index is generated by adding the prices of each of the stocks in the index and dividing them by the total number of stocks. Stocks with a higher price will be given more weight and, therefore, will have a greater influence over the performance of the index.
And how are those 30 significant stocks chosen? This according to Indexology:
Typically a company is added to The Dow only if has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors. While it’s true that both Apple and Google would certainly seem to meet these criteria, this qualification doesn’t necessitate their inclusion in The Dow—nor does their sheer size, although it also weighs in their favor. The Dow’s methodology allows for subjectivity, and ultimately stock changes are made at the discretion of the Averages Committee.
So where does this leave us? A concentrated index that is heavily influenced by price where stocks are added at the discretion of a committee. Therefore, the selection of a stock added to an index can have a huge impact on the index level.
