The Only 4 Dow Stocks That Really Matter

The Dow Jones Industrial Average (INDEX: ^DJI  ) is probably the most widely tracked stock market measure in the world. But what many people don't understand about it is that day in and day out, only a few stocks really have a huge impact on the Dow.

The thing that sets the Dow apart from other benchmarks like the S&P 500 is the fact that it's not market-cap weighted. Instead, the Dow moves up and down based solely on the total net prices of stocks that make up the average.

Ignoring the small fry
The implications of this are that the stocks with the lowest share prices have almost no impact on the Dow. For instance, Bank of America was the biggest mover in the Dow during the first eight trading sessions of the year, jumping more than 22%. But in pure price terms, its shares only rose by $1.23 -- equivalent to less than 10 Dow points.

As a result, the nine cheapest Dow stocks account for less than 10% of the value of the index. Meanwhile, four stocks have a huge impact on the Dow:

  • Diversified technology king IBM (NYSE: IBM  ) clearly has a huge impact on the tech world. But at almost 11% of the Dow, the company singlehandedly has double the influence of Microsoft, Intel, and Cisco combined.
  • Chevron (NYSE: CVX  ) plays second fiddle to ExxonMobil, with about half the latter's market cap. But in the Dow, Chevron outpaces Exxon, with a 6.4% weighting to Exxon's 5.1%.
  • Caterpillar (NYSE: CAT  )  recently pushed above the $100-per-share level. That's enough to give the construction equipment company a 6.2% weighting in the Dow, despite having sales of only around $56 billion over the past year -- far less than many of its lower-weighted Dow peers.
  • McDonald's (NYSE: MCD  ) has long been the big player in fast food. But many would fairly question whether it deserves a 6%+ weighting in an average of industrial stocks.

So when you look at the ups and downs of the Dow, keep in mind that in reality, you're really just looking at a handful of stocks. Lower-priced Dow stocks make just small amounts of noise compared to these four high-priced giants in the average.

With the Dow's shortcomings, look beyond the average for the best stocks. Check out The Motley Fool's latest special report to discover our top stock pick for 2012. It's free, but it won't be available for long, so get your copy now.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. You can follow him on Twitter here. The Motley Fool owns shares of Cisco, Bank of America, Microsoft, IBM, and Intel, as well as having created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco, Chevron, McDonald's, Intel, and Microsoft, along with creating a bull call spread position in Intel and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1758080, ~/Articles/ArticleHandler.aspx, 10/1/2014 10:31:54 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement