Dow Jones Industrial Average - Assessment

Assessment

With the current inclusion of only 30 stocks, critics like Ric Edelman argue that the DJIA is not a very accurate representation of overall market performance. Still, it is the most cited and most widely recognized of the stock market indices. Additionally, the DJIA is criticized for being a price-weighted average, which gives higher-priced stocks more influence over the average than their lower-priced counterparts, but takes no account of the relative industry size or market capitalization of the components. For example, a $1 increase in a lower-priced stock can be negated by a $1 decrease in a much higher-priced stock, even though the lower-priced stock experienced a larger percentage change. In addition, a $1 move in the smallest component of the DJIA has the same effect as a $1 move in the largest component of the average. The Dow would see the negative effects of this price-weighted average during September–October 2008 with a former component AIG. Before its reverse-split adjusted stock price change, the stock collapsed from $22.76 on September 8 to $1.35 on October 27; contributing to a roughly 3,000 point drop in the index.

As of August 2012, IBM and Chevron are among the highest priced stocks in the average and therefore have the greatest influence on it. Alternately, Bank of America and Alcoa are among the lowest priced stocks in the average and have the least amount of sway in the price movement. Many critics of the DJIA recommend the float-adjusted market-value weighted S&P 500 or the Wilshire 5000, the latter of which includes all U.S. equity securities, as better indicators of the U.S. stock market.