Understanding the Dow Jones Industrial Average

A Visualization by Sarah Swanz

The Dow Jones Industrial Average is a commonly-used indicator of stock market performance in the United States. The Dow is an average of the prices of 30 large publicly-traded companies divided by the Dow Divisor. The Dow Divisor is adjusted whenever there are stock splits, mergers or spinoffs, and changes among the Dow component companies. This helps maintain the continuity of the index and avoid the distortion such changes would otherwise cause. The Dow is a proprietary index first developed in 1896 and now owned by S&P Dow Jones Indices.

The Dow is a price-weighted average of its component stocks. As a price-weighted average, it gives higher-priced stocks more influence over the average than lower-priced stocks, and does not take into account the relative market capitalization of its component companies. For example, a $1 increase in a $10 stock can be negated by a $1 decrease in a $100 stock, even though the $10 stock had a 10% increase and the $100 stock had merely a 1% increase.

Boeing and Goldman Sachs currently are two of the highest priced stocks in the Dow and therefore have the greatest influence on it. On the other hand, Cisco Systems and General Electric are two of the lowest priced stocks in the Dow and have the least amount of influence on the price movement. The weight of each stock in the Dow is a measure of its influence.

Some critics advocate for a change in the weighting of Dow components to better reflect their market capitalization (the number of shares outstandings x the price). If each stock was weighted equally, then their weights would all be 3.33%.

The first chart below shows the weights of the component stocks of the Dow in its current price-weighted form and compares them what their weights would be if the Dow were weighted by market capitalization instead. You can hover over the dot to get the exact weight.

You may have noticed that some stocks, like Visa and Chevron, would not have changed very much if the weightings changed. And their weights are very close to what it would be if the stocks were equally weighted.

On the other hand, some stocks like Apple and Microsoft would see a huge change in their influence over the Dow. In fact, of the top six companies that would see the largest increase in their weights, four are in the technology sector. (By the way, Apple only joined the Dow in 2015, replacing AT&T.)

In the next chart, you will see how much the Technology sector would influence the Dow if the Average became weighted by market capitalization. You will also see how this change would come at the expense of the Industrial and Financial Sectors. You can decide for yourself whether you think current Dow over-emphasizes certain sectors or stocks. Feel free to hover over a block and see the different weightings for that company.

Data as of November 10, 2017. Stock market data retrieved from Yahoo Finance.

Copyright: Sarah Swanz 2017