The Dow is made up of 30 American companies representing
major industries. All but 2 of these are traded on the
NYSE, along with Intel and Microsoft which are traded on
the NASDAQ.
Charles H. Dow, with the urging of Collis Huntington
(builder of the Union Pacific Railroad) co-founded Dow
Jones and Company in 1882. With his partner Edward
Jones, he began his famous market tracking index on July
3, 1884. This original index represented the average
stock price of just 11 companies, most of them
railroads, and was first published in Dow's
Customer’s Afternoon News Letter and then in the
Wall Street Journal which he began in 1889. On May
26, 1896 the Dow average was expanded to 12 companies,
then 20 in 1916, and finally 30 companies in 1928.
The editors of the Wall Street Journal, published
by Dow Jones and Company, changes the list from time to
time to reflect the leading companies in America's most
important industries.
Here are some of the early companies on the Dow list:
American Cotton Oil
American Sugar
Distilling and Cattle Feeding
General Electric
Laclede Gas
Natural Lead
Tennessee Coal and Iron U.S. Leather
Other companies included over the years have been Victor
Talking Machines, Remington Typewriter, and Studebaker
Automobiles.
Today, we have
Alcoa, American Express, AT&T, Boeing, Caterpillar,
Citigroup, Coca Cola, Dupont, Disney, Eastman Kodak,
Exxon Mobil, General Electric, General Motors, Home
Depot, Honeywell, Hewlett-Packard, IBM, International
Paper, Merck, Johnson & Johnson, JP Morgan, McDonald's,
3M, Microsoft, Philip Morris, Proctor & Gamble, SBC
Communications, United Technologies, and Wal-Mart.
In just the past few years, Allied Signal, Chevron,
Goodyear, Sears, Travelers Group, Avistar, Primerica,
USX Corp, and Union Carbide were replaced with
Citigroup, Home Depot, Honeywell, Intel, Microsoft,
Disney, Caterpillar, JP Morgan, and SBC Communications.
In 1972, there were also American Can, Anaconda Copper,
Bethlehem Steel, Chrysler, F.W. Woolworth, Int’l Nickel,
Owens-Illinois Glass, Swift, and Westinghouse. |
How is the Dow calculated? Originally you just added up
the prices of the 12 companies and divided by 12, very
simple. In 1928, a divisor of 16.67 was used to adjust
for mergers, takeovers, bankruptcies, stock splits, and
company substitutions. Today, we add up the 30 stock
prices and divide by .14452421. This means that for
every $1 move in a Dow's stock price, the average
changes about $6.92.
If this seems like a good way to measure the performance
of the stock market to the news services, it is because
no one seems to want to declare how ridiculous the Dow
Jones Industrial Average really is. Consider this:
The Dow measures the performance of only 30 companies
out of thousands.
These companies are selected by the editors of a
newspaper
If one of these companies isn't doing well, they
substitute it with a hot new company, as when they
kicked off Woolworth's to make way for McDonald's
All stocks are considered equally. If a $100 stock goes
up $2 or just 2%, it moves the index exactly the same
amount as a $20 stock going up the same $2 or 10%.
The Dow does not include the effect of dividends, which
over time can make a substantial difference
The index is not market cap weighted as the S&P 500 is.
This is important as you will see from this example:
The Dow at its high on 1-14-00 was 11,722.98, and the
total value of all the stock in the 30 Dow companies was
$4.38 trillion. 14 months later, the index had dropped
16.8%, but the market value of these companies had
dropped 25.6%. In plain English, the Dow went down 17%,
but investors lost a whopping 26%. That's an extra $400
billion.
For all its shortcomings, the Dow is an important
measure of the market. It has withstood the test of time
in fairly accurately reflecting the health of the
market. It's reported everywhere, in newspapers, TV, and
radio. It influences how investors feel about the
market.
When someone talks about the market's ups and downs,
they're talking about the Dow. You need to pay
attention to it because everyone else is.
The Dow's worst one-day drop wasn't Black Thursday on
October 28, 1929, or Black Friday on the 29th (their
two-day combined loss was 24%). It was Black Monday on
October 19, 1987 when the average plunged 508 points and
23%.
Other Stock Market Basics Topics:
-
What is a stock market
index?
-
Dow Jones
Industrial Average
- S&P 500 (Standard and
Poor’s, a McGraw-Hill Company)
- Other S and P Indexes
- The NASDAQ
- Wilshire Indexes
- Barra Indexes
- Russell (Frank)
Indexes, Covering the Nasdaq stocks
- EAFE Index
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