It seems like every time I turn on CNBC, Bloomberg or any other financial cable news channel, there is a 100 MPH, edge of your seat, update on the stock market. The update usually shows a graph of the Dow Jones Industrial Average and goes along the lines like “the market takes a dive as the Dow sink .001% in early hours trading”. Besides wonder why people are getting all worked up about a small 1 day drop in the market, it really bothers me that people seem to think that the Dow = stock market.
However it is understandable why people think that way. First of all the Dow has been around for a long time, like a really long time, tracing it’s introduction to 1885. Also Dow is just the biggest number around (except for lesser known indexes but I’ll get to those in a minute), currently (as of 8/2/19) at a hefty $26,485.01. The common man probably sees the Dow at about $26K and compares it to the Nasdaq (at $8004.07 as of 8/2/19) and the S&P (at $2932.05 as of 8/2/19) and assumes the one with the high price has more stock in it and due to a combination of that and the branding that comes with being the benchmark for over a century people think that the Dow really is a synonym for the stock market, which in reality is very much, incorrect.
For starters, the Dow Jones Industrial Average is a price weighted index of 30 huge companies with a combined market capitalization of $6.56 trillion as of December of 2018. That is a lot of money but it doesn’t compare to the S&P 500 which is a much more reliable indicator of the stock market. The S&P 500, is made up of 500 of the largest companies and has a massive market cap of $25.6 trillion. The stocks that are in the S&P 500 make up about 75% of the total market capitalization of United States of America stock market. Also the S&P 500 is based on the market caps instead of the prices like the Dow is. For example a stock that goes through a stock split will not be weighed less than it was prior to the split.
However if you’re really trying to flex your financial knowledge (like if you’re in a financial job interview or something) then talk about the Wilshire 5000. Whereas the S&P 500 makes up about 75% of the total stock market, in terms of market capitalization, the Wilshire 5000 is literally the entire market. The Wilshire 5000 was created in 1974 and has a total market cap of $30.1 trillion. In fact there actually aren’t even 5000 stocks in this index, there are only 3,486 stocks as of June 2018. So if you want the real, true blue picture of the stock market, then be sure to name drop the Wilshire 5000.
In conclusion the Dow Jones will always be the top dog of stock market indexes. It’s been around the longest and continues to be a synonym for the stock market. But hey, at least now you can join me when someone on the T.V. talks about how the market is doing and shows the same info graphic of the Dow Jones Industrial Average. Also you have a cool, neat fact to tell people when you’re trying to pretend your a financial guru.
DISCLAIMER: This is not business or financial advice. The post is strictly in my opinion. Any business or financial decisions should be made with the input of a consultant or business/financial advisory professional.