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The Dow is distorted
- Thread starter WINEX_IHB
- Start date
jbenko_IHB
New member
Isn't the value of the DOW calculated by the ratio of 7.1 but also dependant on the amount of shares the stock trades? For example a stock worth 100 dollars drops 50 bucks but only has 1 share. So value lost is $50 bucks. However, a stock worth only 5 dollars drop to 4 dollars but has 1 trillion shares has a value loss of 1 Trillion.
Fascinating reading.
Personally, the way I would weigh an Index is:
Price of stock X Shares outstanding = $ Value
Take the $ Value of all companies listed and add them together. Then adjust that amount by a factor of 100 or 1,000 or so to make the number easier to read. So basically take the Market Cap and divide it by like 1K or something.
That is how I measure the +/- in the stock market. I get a daily download of all prices + shares outstanding then calculate the difference from one day to another. (this way you can also see money flow in and out of the system)
Fascinating reading.
Personally, the way I would weigh an Index is:
Price of stock X Shares outstanding = $ Value
Take the $ Value of all companies listed and add them together. Then adjust that amount by a factor of 100 or 1,000 or so to make the number easier to read. So basically take the Market Cap and divide it by like 1K or something.
That is how I measure the +/- in the stock market. I get a daily download of all prices + shares outstanding then calculate the difference from one day to another. (this way you can also see money flow in and out of the system)
No, the Dow isn't a weighted index. <a href="http://www.investopedia.com/articles/exchangetradedfunds/08/market-equal-weight.asp">The S&P 500 is market cap weighted</a>, but the Dow is simply the sum of all the stock prices and the divisor mentioned in the article I linked to.
What is surprising to me is how unimportant the financial sector is in the index. I've always felt that the composition of the DJIA didn't accurately reflect our economy, but this just shows how far off it is.
What is surprising to me is how unimportant the financial sector is in the index. I've always felt that the composition of the DJIA didn't accurately reflect our economy, but this just shows how far off it is.