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.


 

advertisement

Show Bankrate's community sharing policy
          Connect with us
advertisement
CD & INVESTING NEWSLETTER

Learn the latest trends that will help grow your portfolio, plus tips on investing strategies. Delivered weekly.

CDs and Investment

Can cash-out refi help 401(k)?

Dear Dr. Don, I just refinanced a $65,000 10-year mortgage at 6% with a refi at 2.6% over 10 years with $14,000 cash out. Closing costs were $2,660. I am interested in putting $10,000 in my 401(k) tax-deferred account at... Read more

advertisement

Blog

Sheyna Steiner

Last week a bunch of 401(k) investors freaked

Goosed by stock market losses last week, some 401(k) investors sold out of stocks and bought fixed-income investments, HR consultant Aon Hewitt reported.  ... Read more

Partner Center
advertisement

Connect with us