Why The Dow Jones Average Is Actually Meaningless

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[Chica Chaser]

The Dow has always been relatively meaningless. Its just an index that shows how 30 large publicly owned companies have traded during a standard trading session. 30 companies out of some 2800 companies traded on the NYSE every day, not including another 3200 companies traded on NASDAQ exchange.

Dow is just a very small snapshot of the overall markets.

[Texas Contrarian]

Tradition is the only reason the Dow Jones Industrial Average still hangs around today. It dates back to the late 1800s, and is obviously made up of only a few very large-cap issues. In addition to that, it's price-weighted rather than market cap-weighted, which is ridiculous.

The S&P 500, which is (correctly) price-weighted is a far better index. It's the one generally used as a benchmark by investment professionals. The ultra-broad-based Wilshire 5000 (which doesn't actually track quite 5,000 stocks) is also market-cap-weighted, but far less well-known and popular.

Still, the Dow and S&P track each other fairly closely most of the time, so a lot of people outside the financial world don't really make that much of an effort to change old habits.