Dow Jones Industrial Index (DJI) is the most cited stock index which is the index of prices of 30 stocks of major U.S Industrial Corporations but it has two major problems.
It is not diversified enough to accurately reflect the wide spectrum in the U.S.
It corresponds to a portfolio strategy that is not suitable as a performance benchmark
Therefore, most professional investors prefer to use other indexes like the Standard & Poor's 500 (S & P 500)
Company Base Year Now No. of Shares Market Value
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Base Year Now
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IBM $ 100 $ 50 200 million
DEC $ 50 $ 110 100 million $ 20 billion $ 10 billion
$ 5 billion $ 11 billion
Total
$ 25 billion $21 billion
Weight 20 / 25 = 0.8 5 / 25 = 0.2
Decline of 25-2125= 0.16 or 16%
DJI - Type Index = Avg. of Current Stock Price x 100
............................Avg. of
Base year Stock Prices........................($ 50 + $ 100) / 2 x 100.........
.......($ 100 + $ 50) / 2= 106.67 or increase of 6.67%
S & P - Type Index = (Weight of IBM x Current Price of IBM
.Base year Stock Prices
.......+.....Weight of IBM x Current Price of DEC..................................................Avg. of Base year Stock Prices) x100(0.8 x 0.5 + 0.2 x 2.2) x 100.............L..........= 0.84 or 84%, a decrease of 16%Thus, the index shows a 16% decline, which accurately reflects the total market value of the all Stocks
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