Most newspapers and television shows love to quote the Dow Jones when explaining the markets movements. The average was started by Charles Dow in the 1800’s as a way to measure stock market movements, but many academics are now questioning its relevance.

The Dow Jones only includes 30 stocks that are selected by a committee to best represent more than 6,000 readily-priced publicly traded companies in the United States. Several major sectors are not even represented in the index, such as transportation and utilities. Some consider this outdated now that computers are capable of calculating much larger indexes, such as the Russell 3,000.

The Dow Jones also has a few flaws in the way the index is calculated. The index is price-weighed, which means that it is not weighted according to the value of the companies like the S&P 500. So, for example, if a $20 stock moves up $1, the move can be negated by a $1 move in a $100 stock. This skews the average towards the activity of higher priced stocks. Another key flaw is that the Dow Jones doesn’t include dividends in its calculation.

Regardless, the Dow Jones remains a very important average for the American public. The media often quotes the average as a broad measure for the market. However, before you get concerned when the Dow Jones falls sharply, keep in mind that the rest of the market may be healthy. This is especially important to remember during these troubled times – there are plenty of healthy stocks out there.