Many stock market observers and participants were high-fiving each other yesterday, when the Dow Jones Industrial Average closed above 10,000 for the first time in about a year and a half. An important "psychological" barrier was crossed, reportedly.
Yeah, well ... think about it all and you may come to see it as little more than hype. For starters, reflect on what "The Dow" really represents. It's used by the media as a sort of proxy for the overall market. Reporters gush that "The Dow is up 86 points!" as if to tell us that the market as a whole is up. But that's not really the case. The Dow is simply an index, and a pretty narrow one at that, containing just 30 companies.
That's right -- all the hand-wringing about the Dow and whether it will cross the 10,000 mark concerns the stock prices of 30 companies. To be sure, they're names you've heard, such as General Electric (NYSE: GE ) , Microsoft (Nasdaq: MSFT ) , and McDonald's (NYSE: MCD ) . But remember, there are more than 5,000 publicly traded firms in our stock market, many of which have very little in common with the Dow 30. If you're invested in 10 to 20 companies, many of them small ones perhaps, how much does it really matter to you how the prices of 30 big companies moved today?
A few more interesting facts about the Dow: Its component companies are selected by the editors of The Wall Street Journal. The index is 107 years old. If you're wondering how the average price of 30 stocks can be anywhere in the thousands, it's because a little thing called a "divisor" is involved. Unlike some other indexes that are weighted according to companies' market values, the Dow is price-weighted, meaning that the higher the stock price, the bigger percentage of the Dow the stock represents.
Meaning also that the divisor is adjusted to reflect the effects of stock splits, dividends, and the like. Recently, fully a quarter of the Dow's value was attributed to just four companies: Procter & Gamble (NYSE: PG ) , IBM (NYSE: IBM ) , United Technologies (NYSE: UTX ) , and 3M (NYSE: MMM ) .
So next time you hear about the Dow's big move, remember that it's not all it's cracked up to be. If you're looking for a truer representation of the overall market, pay attention to the Standard & Poor's 500 (S&P 500) index, which tracks 500 major American companies, or the Wilshire 5000, which tracks just about every public company. You can learn all about them in our 60-Second Guide to Index Investing and in our Index Fund area.