How the Dow's Price-Weighted Scoring Played Out Today


Dow Jones Industrial Average scores are calculated based on share prices, not percentage moves or market caps. It's a somewhat controversial choice that makes a big difference in the way share-price swings affect the index. Here's how this choice has played out today (numbers are current as of 1 p.m. EDT).

How the Dow Is WeightedInfographics.

Those are the basics. Click through the three views of this data and you'll notice that nothing much changes. IBM holds the largest share price on the index by a wide margin -- 67% higher than the nearest comparison -- and so it dominates the Dow like nobody else. Big Blue accounts for more than 10% of the total Dow score. A 1% change in IBM's share price will add or remove about 16 Dow points.

The second-weightiest Dow stock, oil giant Chevron, would have to score a 1.7% gain to move the Dow's needle that far.

And with its single-digit share price, aluminum producer Alcoa represents just 62 Dow points overall. The stock would need a 26% spike to match the 16-point impact of a 1% move in IBM's prices. You can explore the spread between percentage moves and Dow point impacts in the next chart:

What the Weightings MeanCreate infographics.

So the market took a nosedive on Thursday. Housing trends aren't what they should have been, Ben Bernanke signaled a probable end to the long-running federal stimulus program, and the world is plainly coming to an end. These factors combined for a 1.3% drop in the Dow at midday.

It's a large move that kind of hurts to look at, but I hope you heard the tongue in my cheek as I talked about the end of the world. The second coming of 1929's Black Tuesday this is not, nor is it a repeat of the Lehman Brothers panic.

Let me remind you that the Dow has dropped more than 1.3% overnight 10 times in the last year, and the sky never fell. In fact, the Dow jumped 1.3% or more 12 times in the same period and is up 16.3% all things considered.

These hiccups happen. And the Dow isn't always the best barometer of overall market health, either.

For example, Walt Disney suffered a 2.6% swoon -- the second-worst overnight drop on the Dow today -- thanks to general market panic plus a downgrade from influential analyst firm Goldman Sachs. But Disney's shares trade at just $63 apiece, so the Mouse's move only shaved 12 points off the Dow. Big Blue's much narrower 1.4% loss translated into 21 Dow points lost, presumed dead.

For an even starker example, look at chip giant Intel . The Dow's biggest day-to-day drop, just slightly higher than Disney's 2.6%, translates to no more than five Dow points when you do the math. Those are the breaks when your share price hovers in the $20 to $30 range, as Intel's does.

This is why the Dow doesn't always reflect the health of the overall market. A significant move by IBM or any of its triple-digit share-price pals can -- and often does -- steamroll over the swings of less pricey Dow peers. To underscore the skewed nature of the oft-referenced index, let me point out that IBM holds just 5% of the Dow's total market-cap value, 3.4% of the Dow's total trailing revenue, and 5.6% of total earnings.

Big Blue may be a giant, but with a 10.3% index impact, it's clearly over-represented among Dow stocks.

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