The Dow Jones Industrial Average, along with its related exchange traded funds (ETFs), is one of the most prominent stock benchmarks, with millions around the world following its every movements every day. How is it calculated?
The Dow is made up of 30 stocks but uses a divisor – not just dividing by 30 – that is gauged to make the Dow’s average equivalent to past levels due to shifts in its composition, reports Walter Updegrave for CNNMoney. The divisor, which is currently 0.132129493, will change as stocks are swapped in or out of the index.
Additionally, the Dow is weighted by each stock’s share price – higher priced stocks have a larger impact on the Dow’s movement. This price-weighting methodology may result in smaller companies with a larger impact on the Dow’s movement because the smaller company trades at a higher price, which differs from some other indexes that weight holdings based on market capitalization. [ETFs to Play the Major Indexes.]
By monitoring stock and bond indexes, investors may gauge the performance of their investments. If there is a large disparity between returns, then it may be time to readjust one’s portfolio based on risk as compared to the market.
For more information on the Dow, visit our Dow Jones Industrial Average category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.