Question

Explain why investors should pay little attention to the DJIA. What index is a better indicator of overall market performance?

Answer 1

Dow Jones Industrial Average (DJIA)

DJIA is a price weighted index of 30 stocks with higher share prices. It is a stock market index which arrives with the addition of all the prices of 30 stocks and then dividing it by the divisor which is currently less than 1.

Dow Jones Index was founded by Charles Dow who founded the Wall Street Journal in 1889 with statistician Edward Jones. Originally, Dow Jones have 12 stock companies comprising the index.

Investors must pay little attention to DJIA as the recent jump in the beginning of the year from 25,000 to 26,000 is merely a 4% jump. As it a price weighted index, therefore, a major price in rise of a share of a particular company reflects the index. Example, Boeing account for a quarter rise in the Dow Jones index with contribution of 25% in Dow Jones Index .

On a contrary, Standard's & Poor's (S & P 500) is a Market Weighted Index and a true index as it captures the performance of market's sheer size comprising massively a public companies. It contributes to almost 75% of all movements to the US share market. Considering the previous example of Boeing, it contributes to only 2% to S & P 500 index.

Thus, S&P is the true index for investors.