You Hear If The Dow Was Up Today?
A common question for investors, right? Well, I have another one,
"What is the Dow?"
To better understand the Dow Jones Industrial Average (better known as
"the Dow"), you must first look at its history. The average
started over 100 years ago, when Charles Dow, one of the founders of Dow
Jones & Co., cobbled together a list of 12 companies that served as a
proxy for the U.S. stock market.
Over time, stocks were added to the industrial average while some were
eliminated and others substituted. In 1928, the industrial average was
expanded to 30 stocks, where it stands today. By then proprietorship of
the Dow placed in the hands of the editors of the Wall Street Journal
(published by Dow Jones & Co.). The only surviving member of that
inaugural season is General Electric.
At first the calculating was easy. All that had to be done was add up
the closing price of each of the 12 stocks in the average and divide by
12. The result was the closing average of the Dow industrials for that
As time wore on the figure by which the tally of the closing prices was
divided (the "divisor") had to be tweaked to maintain historical
comparability. The divisor continues to be updated. Under the rules, the
divisor is changed whenever a component stock splits, a company spins off
an operating division, or when any of the companies that make up the
average are replaced with other stocks. Under some circumstances, the
divisor is changed if one of the companies pays out a dividend. The
divisor is available in the Wall Street Journal in a chart in the Money &
Investing section or at
Dow Jones Indexes.
Today, the divisor is actually a fraction around 0.2. If, for example,
the divisor stood at 0.20145268 then each one-point move in a component
stock in the average translates into 4.96 points in the average. A
characteristic that distinguishes the Dow from other popular market
measures is that it is price-weighted. If, for example, on a given day,
shares of Merck & Co. add five points while the other 29 stocks are
unchanged, the Dow would record a gain of 24.08 points. And the same
result would occur if Wal-Mart Stores Inc. gains five points while all the
other stocks in the average are unchanged. For the purposes of the Dow, a
point is a point, regardless of whether it comes from a high-priced stock
or a more moderately priced issue.
By contrast, the Standard & Poor's 500 Stock Index, another market
indicator, is a market-capitalization weighted index. The S&P index
adjusts for differences in the relative size of its component companies.
As a result, shares of GE, which has a market capitalization of more than
$200 billion gets a relatively larger weighting in the tally of the
S&P index than does, say, Adobe Systems Inc. with its market
capitalization of around $3 billion.
Critics have long contended that the market-capitalization weighting of
the S&P 500 index, and the broader snapshot of the market that that
index gives, make it a better indicator of the market than the Dow. In
fact, the Dow has shown to be as good as the S&P 500. Last year, both
barometers rose more than 20 per cent. Despite the criticism about the
Dow's narrowness or its stodginess, the two yardsticks, historically, have
performed just about the same.
Regardless of what many investors think, size is not a strict criterion
for inclusion in the Dow industrial average. These are not the 30 biggest
companies in the U.S. In fact, PepsiCo and Ford are not included in the
average. The Wall Street Journal editors who decide the composition of the
average have seen fit to leave them out. Their rationale is that
competitors stand as proxies for the businesses those two are in, General
Motors Corp. for the auto industry, and Coca-Cola Co. for the food and
Choosing which companies to include, or when and which to substitute,
is the part of the industrial average that is more art than science. There
are no hard-and-fast criteria. Journal editors subjectively pick and
choose from among all U.S. businesses to come up with a mix that attempts
to reflect the country's corporate landscape. The 30 companies that
compose the Dow industrial average are among the biggest, best-known, most
highly regarded public companies in the world.
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