Stock Exchange Question

[Jon_in_london]

So, I hear the FTSE100 is at 4238 and has risen by 32 points.

What the feck does this mean? 4238 what? apples? pork pies? billions of £? what?

[Attrayant]

This reply deals with the DJIA since I don't know much about the FTSE. Perhaps they are similar.

The Dow, being first compiled in 1896 and intended to represent a cross-section of American Industry, was originally comprised of 12 stocks: American Cotton Oil, American Sugar, American Tobacco, Chicago Gas, Distilling & Cattle Feeding, General Electric, Laclede Gas, National Lead, North American Tennesee Coal & Iron, U.S. Leather preferred and U.S. Rubber.

In the late 90's, the DJIA dropped Sears, Goodyear, Chevron and Union Carbide for Microsoft, Home Depot, Intel, and SBC Communucations. Over the years, the number of represented stocks has been increased to 30. In addition, they also come up with a divisor (http://www.morevalue.com/glossary/restrict/DJIA%20Divisor.html) to take into account stock splits, changes in prices when a company was added or dropped, etc. Thus if the Dow is at 10,000, it means that the sum of the stock prices of those stocks, divided by the divisor equals 10,000. Thus we have the Dow Jones Induatrial Average.

Because the divisor can be a very small number (right now it's 0.1458), very small stock price changes in a single stock can have a dramatic influence on the overall average. For this reason, most wall street insiders don't consider the DJIA a good measure, opting instead for the S&P 500.

[hgc]

The DJIA is of no consequence to investment professionals. One reason is the small sample size (30 stocks). Another reason is that it is a price-based index, as opposed to S&P 500, which, with it larger sample size, is a value-based index. This makes it much more relevant as a measure of market preformance and as a benchmark against which to measure portfolio performance.

In any case, the make-up of the numbers themselves are not so important as how much they trend up and down, over time, in any given period of time, by what % of the total, etc.