Calculating Dow 30 index?
How does DowJones calculate index price? I know it isn't market cap weighed like S&P500. But how do they do it? Let's say, one day all 30 component stocks traded at $30.00, how much will the Dow30 be?
- Adoptive FatherLv 61 decade agoFavorite Answer
It is a price-weighted index. You simply add up all the prices of the thirty stocks in the index then divide by the magic number (can't remember the technical term). The magic number is published in the Wall Street Journal. Companies come and go from the index, therefore when there is a change in the Dow components, the number has to be adjusted to not affect the value of the index.
You are right in that the Dow does not take into account market capitalization.
As an example, when an issue increases from $10 to $11 that is a 10% increase. An increase from $100 to $110 is also a 10% increase. The stock move from $100 to $110 makes more of an impact to the Dow than the increase from $10 to $11.
- 5 years ago
When the Dow drops 300 points, the effect is relative. If the Dow is at 12,000 and drops 300 points, then it dropped 2.5% which is not bad. But if the Dow is at 5000 when it drops 300 points, then it dropped 6% which is worse. So you have to measure the Dow change in percentage to get a better meaning. Dow Jones is short for Dow Jones Industrial Average (DJIA). It covers 30 large-cap companies, which are subjectively picked by the editors of the Wall Street Journal. Over the years, companies in the index have been changed to ensure the index stays current in its measure of the U.S. economy. To calculate the DJIA, it is somewhat complicated. The current prices of the 30 stocks that make up the index are weighted and added and then divided by the Dow divisor, which is constantly modified. Click on my source link below for more detailed information.