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We’ve all heard “the Dow is up” or “the Dow
is down” at some point in our lives, even though we might not
have fully understood exactly what it meant at the time. Whether
you know it as “The Dow Jones Industrial Average,” the
“Industrial Average,” the “Dow 30,” or simply
as the “Dow,” the Dow has shown how 30 large, publicly
owned U.S. companies have performed during a trading session for
over one hundred ten years. Theoretically, how these 30 stocks perform
should represent the entire market. By tracking the fluctuations
in both good times and bad, the Dow gives an important insight to
investors into the ever-changing financial landscape.
Dow Jones History
The Dow was founded by Charles Dow in May of 1896, making it the
oldest stock index still in use today. It got its name from its
founder as well as his business associate, statistician Edward Jones.
They decided to use twelve of the leading U.S. industrial companies,
thinking that these companies would be an excellent indicator of
the U.S. economy. Out of the twelve original stocks, only one is
still currently part of the index today – General Electric.
Since its origin the Dow has since grown to represent 30 companies,
and although the Dow does not represent industrial companies any
longer, they have retained the “Industrial Average” name.
Dow Jones Components
Some of the current components of the Dow are companies like American
Express, Coca-Cola, Boeing, Pfizer, United Technologies, Caterpillar,
Verizon, McDonald’s, and Wal-Mart. Only one of the original
12 components of the Dow is still a part of the index (General Electric),
and the remaining 29 can change as market conditions warrant. For
example, in 2008 Kraft Foods replaced AIG, and Chevron and Bank
of America replaced Altria Group and Honeywell. When changes like
this occur, the scale factor used to calculate the index is also
adjusted so as to not directly affect the average.
Dow Jones Fluctuations
Similar to all other stock market indices, the Dow also goes through
periods of increase and decrease. Bull markets and bear markets
are just a part of the game with bull markets indicating price increases
while a bear market indicates price decreases. Some of the most
notable gains and losses occurred in years like 1929, when the Dow
erased 36 years of gains dropping to its lowest point since its
inception, or in 1982 when it was at just 777 and grew to over 11,000
in 2000.
Criticism of the Dow Jones
Many critics believe that only including 30 stocks does not paint
a very accurate picture of the overall market performance. However,
the Dow still remains to be one of the most cited and recognized
stock market indices. Critics, like Ric Edelman, think that the
Dow should take on a “float-adjusted market-value” like
the S&P 500 for a more accurate financial picture within the
United States. The Dow currently uses a price-weighted average,
giving higher priced stocks more control over the average than its
lower-priced equivalent.
Dow Jones Calculations
The Dow Jones Industrial Average is calculated by dividing the
sum of the prices of all 30 stocks by the Dow Divisor. The Dow Divisor
is adjusted for events like stock splits or structural changes so
that they do not alter the value of the Dow Jones Industrial Average.
Originally the Dow Divisor was 12, the number of component companies,
making it a simple arithmetic average. When changes in the list
of companies making up the index alter the sum of the component
prices, the Dow Divisor must be updated in order to avoid discontinuity
within the index.
The Wall Street Journal
Acquiring its name from the heart of the New York financial district,
the Wall Street Journal has been in circulation since July 8, 1889.
The
Wall Street Journal, or WSJ, covers financial news and issues
as well as U.S. and international business. The Audit Bureau of
Circulations says it is the largest circulation of any newspaper
in the U.S., having 2.1 million printed copies (including 400,000
paid online subscriptions). It is published by Dow Jones & Company
in New York City and has European and Asian editions. The WSJ has
gone through some major changes over the years, expanding to including
its content on the internet (for paid subscribers) and changing
decades old layouts to save money. It has won 33 Pulitzer Prizes,
most recently in 2007 for its reporting of backdated stock options
and the adverse effect of China’s thriving economy.
Barron’s Magazine
Barron’s
Magazine has been published by Dow Jones & Company since
1921. It got its name from one of the most influential people in
the history of the Dow, Clarence W. Barron. Barron’s Magazine
has four sections: Technology Week, Market Week, Mutual Funds, and
The Wrap. It covers the previous week’s market activity and
gives an insightful look at the week to come. Barron’s is known
to be harsh when assessing corporate prospects, and is well-known
for reporting stock fraud.
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