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9: Don’t Believe the Hype
In
the past week the Dow Jones industrial average has reached record highs,
according to most medial outlets.
However according to several critics of the Dow this statement is
false. Those who do not believe that Dow
has reached its high argue that it is because nobody accounts for inflation in
the Dow Jones industrial average. Also,
the mathematics used to evaluate this number is not as accurate as it could
be.
Charles
Dow, Edward Jones, and Charles Bergstresser founded Dow Jones and Company in
1882. While it started as a little
company, it has become one of the most well known business information leaders
on Wall Street. Because it has been
around for such a long time, employees do not want to change the methods and
strategies of the company, even though they may not be as accurate as they used
to be. When the Dow first started, there
was no computer that could calculate the status of the economy. They found the Dow Jones industrial average by
adding the prices of 30 component stocks and then divided that total by the Dow
Divisor. The Dow Divisor is a number
that changes regularly and counterbalances the effect of stock splits, bonus
issues, dividend payouts, or any change in the component stocks. This was simple math and could be done
without a complex calculator. Today
there is technology that can find an even more accurate number than the Dow
Jones.
Another
reason why the Dow Jones is not as accurate as other indices is because it
focuses on share price. The share price
is the price of a single share of a number of stocks that a company sells. For example, Company A has 100 shares with a
share price of $1. Company B has 2
shares with a share price of $50. Both
companies have a market cap of $100.
However with a 10% increase Company A will add $0.10 to each dollar
share, Company B will add $5 to each share.
Even though both companies are still worth the same ($110) after the
increase, the Dow would care more about the $5 added to Company B than the
$0.10 added to Company A.
The
only advantage that the Dow Jones has over its competitors is its age. Because the Dow Jones is so old and has been
around for over 100 years, everyone has heard about it. The media, such as news television, is what
gives the Dow its popularity. Because of
this popularity, employees of the Dow Jones feel that it would not be worth it
to change anything about it. Even John
Prespo, an employee at the Dow Jones, says that it is not as accurate as it
could be. However, in times of
recession, such as the most recent in 2007, the Dow is easier for people to
understand what is going on. By seeing a
basic number and recognizing it as good or bad, people can determine how the overall
economy is doing. Essentially, the Dow
Jones is a way for ignorant people to understand the US economy.
Although
the Dow Jones gives us a basic understanding of how the economy is doing, it is
not as exact as it could be. The Dow
Jones does not incorporate all of America’s corporations and it only focuses on
the share price of stocks. The Dow
leaves out essential information, such as GDP, in its calculations leaving us
with less accurate information. So while
the media says the Dow has reached its all time high for seven straight days,
they are mistaken. The Dow has not
reached its high since 2000, and in fact we are 11% short of what it was in
2000.
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