The Dow Jones Industrial Average
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.
(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%.
(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.
(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.