The DJIA - How High Can You Go?

The Dow hit another new high this past Thursday. It was up almost 300 points. On Friday, it hit another high. The newspapers and talking heads on CNBC were out with party hats and big announcements to boost their ratings.

But, the Dow is just 30 stocks! How many new highs were there this month for these stocks? 30? 25? 10? 5? Actually, it was only 4. Only 4 stocks out of 30. A mere 13%! But the price of stocks were at the high end of the Dow - CAT, MO, UTX, XOM.

But, let's be fair about this. Let's expand the criteria. How many of the Dow stocks hit new highs this year? 30? 25? 10? 5? Actually, it was 8. Only 8 out of the 30, which is just 25% of all the members.

Something doesn't seem quite right here. And it seems to be the DJIA!

Remember this little lesson for the future. I'll explain why it's important to your portfolio later...

Determining the DJIA - Who or What is Responsible?!

Alright, you were asked to figure out how the DJIA is determined. What was your guess? Let's see if you were right...

The Dow Jones Industrial Average is unique in that it is a price-weighted average. That means the higher priced stocks move the index a greater amount than the lower priced stocks.

But what does that mean?

If a company's stock is selling at $90 a share, and a different stock is selling at $45 a share, the higher priced stock will move the index more than the lower priced stock. However, one of the many flaws in this type of system is quickly revealed when that $90 stock splits 3-1 and is now selling at $30 a share. The stock then moves the index less than the $45 stock. Do you think that makes sense? Of course not!

Big news (all the time) - the Dow hit a new high! But what does that mean? Did all 30 stocks high new highs? Did most of them?

Won't you be surprised... stay tuned...

How is the DJIA determined?

Now that Portfolio Bunny has explained what the Dow Jones Industrial Average is, the question is: How is that average determined?

Logic would dictate you average out all the stocks, divide, multiply, and so forth. WRONG!

Some people might think each stock would have an equal weight in the index. That would make sense, even to Portfolio Bunny. But... it's WRONG.

There are some indices that are weighted by market capitalization. Meaning the larger companies with more stock are given a greater weight in the index. For example: a company like GE would cause an index to move 10x more than a company 10x smaller. WRONG AGAIN!

So, how is the DJIA determined? Come on. Make a guess and send it to Bunny. You might even get it right!

But, in case you can't figure this one out on your own, stay tuned and Portfolio Bunny will give you the answer tomorrow.

What is the Dow Jones Industrial Average?

Well... it's not a mediocre floor cleaner for manufacturing plants.

What it is is the oldest and most quoted market indicator in the United States and the world. It consists of only THIRTY stocks! Most people would consider these "blue chip" stocks.

The DJIA was first published in 1896 during the Industrial Revolution. Initially, it was all industrial companies--hence the name "industrial average." But, over the years, the shift has been made to service companies like Microsoft, Disney, Coca-Cola, and McDonald's.

So, when we talk about the Dow Jones, and it only consists of 30 stocks in a market containing more than 7,000 stocks, how important is this index?