It is an understatement to say that the Dow has been volatile lately. Price swings of 200 points or more in a single day are becoming almost commonplace. During environments of such volatility, however, it is important to keep the volatility in perspective, especially as it relates to the Dow.

For example, in one recent trading day, the Dow was down more than 400 points in the morning. What is particularly noteworthy about that decline, however, was that two stocks - IBM and J.P. Morgan - accounted for more than 200 points on the downside.

In other words, two stocks out of 30 in the index accounted for roughly half the decline.

How can this be? Keep in mind that the Dow Industrials is a price-weighted index. Thus, big swings in high-priced Dow stocks (such as IBM and J.P. Morgan) have a huge impact on the index.

It is quite easy to see how small or large price movements in Dow components can affect the index. Basically, to find out the effect of one Dow stock's price movement on the index, simply take the daily gain or loss for that stock and multiply by 6. For example, a 10-point decline in any Dow stock translates to nearly 60 down points in the index.

Another way to look at the Dow volatility is the following: If every component in the Dow rose one point in a single day (30 total points), the Dow's advance for the day would be nearly 180 points (30 times 6).

It's useful to know how the Dow is calculated to get a handle on the "real" volatility of the index. Indeed, don't be discouraged if you see huge swings in the Dow. Those swings may be caused by only a handful of stocks.

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