That's crucial to understanding how the Dow Jones industrial average climbed to a record high of 14,253.77 on Tuesday. The Dow is a price-weighted average, which means that each $1 move in the price of a Dow stock has the same effect on the average. Companies with expensive stocks have more power to drive the average higher or lower.
A relatively small number of high-priced, strong-performing stocks have driven the Dow to its current level, such as IBM, McDonald's, Home Depot and Wal-Mart Stores. IBM has been the biggest driver of the Dow because its shares are priced far higher than the other 29 stocks within the average. IBM closed on Tuesday at $206.53, compared with $117.93 for Chevron, the Dow stock with the second-highest price.
In fact, IBM contributed 59 percent of the Dow's overall gain since Oct. 9, 2007, when the market recorded its previous high, according to analyst Howard Silverblatt of S&P Dow Jones Indices. Because of its high price, IBM makes up roughly 11 percent of the overall weighting of the Dow. Chevron accounts for just over 6 percent.
Using the Dow's price-weighted method of calculating the average, other top contributors have been McDonald's (26 percent), Home Depot (25 percent) and Wal-Mart (19 percent). Stocks that remain below their October 2007 prices partly offset the positive contributions of the stronger, higher-priced stocks. And although several stocks have done quite well over the last five years, a dozen Dow stocks remain below their prices in October 2007.
The Dow's price-weighted approach differs from that of many other stock indexes, including the Standard & Poor's 500. That index of 500 stocks is market cap-weighted — the greater the overall value of a company's outstanding shares on the market, the greater impact that stock has on the index's movements.
The two largest companies by market capitalization within the S&P 500 — ExxonMobil and Apple — make up 2.97 percent and 2.90 percent of the index.
Dow stocks that are far less influential than IBM and McDonald's include such low-priced names as Alcoa, whose shares closed at $8.35, and Bank of America, at $11.55.
Another reason those two remain less influential is that both are among the dozen that continue to trade below their October 2007 prices: Alcoa is down 79 percent and Bank of America is 78 percent lower.
Below is a look at the relative contributions of each of the Dow stocks to the index from its previous high in October 2007 through Tuesday's close.
Source: S&P Dow Jones Indices