investing

Stock indexes: Dow Jones industrial average

4 stock indexes and their market clout
Dow Jones Industrial Average

The Dow Jones industrial average is one of the oldest stock indexes, dating back to the late 1800s. It's made up of 30 large U.S. companies that are publicly traded. Some of the companies included in the Dow Jones industrial average are American Express Co., Caterpillar Inc., Exxon Mobil Corp., General Electric Co. and Bank of America Corp.

While the stock index is comprised of large U.S. companies, the fact that it only encompasses 30 companies is one reason some analysts say it's flawed.

"Can 30 companies give an accurate barometer?" says Jared Levy, a stock strategist at Chicago-based Zacks Investment Research. "The lack of diversity is probably the No. 1 reason the Dow is a flawed index."

But, it doesn't stop there. The Dow is weighted based on the stock price of a company, not its size. Because of that, the Dow could be up a lot, but it could only be because one issue with a high stock price is moving that day. Take Peoria, Ill.-based construction and mining equipment maker Caterpillar, which trades at more than $100 per share. If Caterpillar had a bad earnings report and shares fall 5 percent, it could drive the entire Dow down, even though it's specific to Caterpillar and not the other stocks in the Dow.


 

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