34% of the Dow Jones Industrial Average's Weighting Is Determined by Just 5 Stocks
Since May 1896, the iconic Dow Jones Industrial Average (DJINDICES: ^DJI) has served as one of the most-watched barometers of Wall Street's health. What was once an index of 12 mostly industrial components has evolved into an index containing 30 relatively diverse, historically profitable, multinational businesses.
Unfortunately, diversification doesn't fix the Dow Jones Industrial Average's biggest flaw: its point-weighted structure. Whereas the benchmark S 500 is a market cap-weighted index -- i.e., larger companies (by market cap) exert greater influence -- the Dow Jones is a price-weighted index. In other words, share price, not market cap, is all that matters.
As of this past August, the Dow's divisor was 0.15172752595384. In simpler terms, every dollar in share price equates to about 6.59 Dow points. Thus, if a Dow component gains or loses $1 in share price, the Dow Jones Industrial Average rises or falls by 6.59 points.
Source Fool.com
