As an educational note, why it is flawed to directly compare the performance of the DJIA and ASX indices.
The Dow Jones Industrial Average (DJIA) and the ASX (Australian Securities Exchange) use different methodologies for calculating their indices, including their approaches to price-weighting.
DJIA (Dow Jones Industrial Average):
Methodology: The DJIA is a price-weighted index, meaning the components are weighted based on their individual stock prices.
Calculation: The index is calculated by summing the prices of its 30 component stocks and dividing by a divisor. Changes in the stock prices directly impact the index value.
ASX (Australian Securities Exchange) Methodology: The ASX uses a market capitalization-weighted methodology for many of its indices, including the ASX 200, which is a common benchmark for the Australian stock market.
Calculation: In a market capitalization-weighted index, the weight of each stock is based on its total market value (market capitalization), calculated as the stock price multiplied by the number of outstanding shares.In summary, the key difference lies in how the indices assign weights to their component stocks. The DJIA uses a price-weighted approach, while the ASX typically uses a market capitalization-weighted approach for its major indices.
