While the Dow is trading down nearly 1.5% due to GE's earnings miss, GE itself is having a relatively minor impact on the total decline in the Dow even though it is down 12%. The reason for this lies in the way the Dow is calculated. Unlike every other major index, stocks in the Dow are weighted according to their price instead of their market cap. Therefore, the lower the stock's price, the smaller its weight in the index. Additionally, when a stock in the index splits, its weighting is automatically cut in half even though nothing has really changed about the company.
As of last night, GE closed at $36.75, giving it a weight in the index of only 2.4%. This contrasts to IBM which is the highest priced stock in the Dow with a weight of 7.7%. Below, we highlight the impact in Dow points of a 12% decline in each of the Dow components. As shown, GE is only having a direct impact of 36 points. If IBM traded down 12%, its impact on the index would have been a decline of 117 points!
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