Ask a Fool: The Dow Just Hit 23,000. What Does It Mean?

Ask a Fool: The Dow Just Hit 23,000. What Does It Mean?

The Dow Jones Industrial Average is not only an arbitrary number, but it is a flawed indicator of how well the stock market is performing.

For starters, the index only considers 30 large stocks. Companies like Apple, Johnson & Johnson, and Microsoft are members. Between the NYSE and Nasdaq alone, there are more than 5,100 publicly traded companies, and the index only represents less than 1% of them.

Additionally, it is a price-weighted index, meaning that stocks with higher share prices matter more to the index's performance. This means that Goldman Sachs, which trades for about $242, has about six times the influence on the Dow as $40-per-share Intel, despite the fact that Intel is twice as large as Goldman Sachs in terms of market cap. In fact, it was a strong day by relatively high-priced Johnson & Johnson that caused the Dow to eclipse 23,000 for the first time.

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Source: Fool.com