I think I am correct in assuming that the Dow Jones Industrial Average is based on the stock price of the 30 companies it’s based on. My question is why there has been so much volatility in both directions as a result of the banking meltdown? Of the 30 companies, I believe only 3 are banks. Have those precipitous drops largely come as a result of those specific stocks dropping, or because of an overall lack of financial confidence amongst the public? For example, ExxonMobil has had record profits recently. Is there positive performance cancelled out by the poor performers? Why would Obama’s choice of Tim Geithner cause the DJ Average to go up 7%? Why is that announcement worth several hundred billion dollars, and which stocks rebounded to reflect the increase in the DJ Average? Thanks in advance.
You can do all of this research yourself - just check the historical prices of the stocks making up the DJI.
I’ll save you some work though - even though the DJ is a sample of a mere handful of companies, it tends to represent the market a a whole fairly well. On days where the DJ index falls, the SP500 (which is a much broader index) tends to fall nearly the same percentage. As to why stocks tend to move in lockstep, well some people have called investors sheep. I wouldn’t go that far, but they do tend to view bad news for “blue chip” companies as bad news for the entire market.
You are pointing out a problem with the DJIA, which stockbrokers have talked about for years. It has some major problems, the biggest being is the DJIA divisor. For a variety of historical reasons, the 30 stocks in the DJIA are all divided by a values in order to make things comparable over the years as stocks are added or removed from the list.
The current divisor is 0.12283402. Essentially all the prices of the stocks in the DJIA are added up and divided by that figure. Any one point change in a stock adds or subtracts over 8 points to the DJIA. A 400-point change translates to only a 48 point change in all the stocks. For thirty stocks, that a change of only about $1.66 a share.
So the numbers exaggerate the actual drop or increase of stock prices. The Dow does indeed act as a crude barometer of what’s going on overall, and is useful as a historical comparision, but it can be misleading.
Most professionals find the S&P 500 a better guide, but the DJIA is here to stay.
I’m not sure I understand this.
Surely a, say, 5% rise/fall in each individual stock would lead to a 5% rise/fall in the index?
Another question: say you have several dozen grand lying around. Can you actually buy into the Dow Jones stocks together or would you have to buy each stock individually?
You can buy a DJIA-tracking index fund (an index fund is a special type of mutual fund which invests in a particular market index in roughly the same proportion as the index itself.)
There’s also the exchange-traded fund Dow Diamonds which tracks the DJIA. You can buy that through a regular stock broker.
Most people interested in index investing go for one of the many S&P 500 index funds, though (my personal favorite.) It gets you substantially more diversity than a DJIA fund.
Yes, but a 5% rise or fall would translate (with the Dow at 8000) to a rise or fall of 400 points. The 400 points is much scarier than 5%.
If every stock in the Dow goes down one point, that’s an overall drop of over 240 points in the Dow. Not many people look at the percentages, just the actual DJIA number.
Thanks friedo and thanks for the link. I’ve been learning much from Google recently. I’ve only recently taken notice of Google Financial and have been playing pretend stock-market (made pretend money too).
Now, if only I had real money to play real stock market. 