Dow Discussion – Part 1 of 3

It today’s environment, it’s hard to get through a news broadcast or cocktail conversation without hearing about the Dow. Was it up, was it down, did it blow up today, were we in the green or the red? These are all questions that swirl around this index, yet few people truly understand what makes up this index or how it works. My goal is to provide a high level summary of the Dow…just enough so the next time you hear it referred to, you know a little more about what it is.

The Dow Jones Industrial Average (NYSE: DJI, also called the DJIA, Dow 30, INDP, or informally the Dow Jones or The Dow) is one of several stock market indices, created by nineteenth-century Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. It is an index that shows how certain stocks have traded. Dow compiled the index to gauge the performance of the industrial sector of the American stock market. It is the second-oldest U.S. market index, after the Dow Jones Transportation Average, which Dow also created.

The average is computed from the stock prices of 30 of the largest and most widely held public companies in the United States. The “industrial” portion of the name is largely historical—many of the 30 modern components have little to do with traditional heavy industry. The average is price-weighted. (Keep this in mind as I will discuss this in future posts). To compensate for the effects of stock splits and other adjustments, it is currently a scaled average, not the actual average of the prices of its component stocks—the sum of the component prices is divided by a divisor, which changes whenever one of the component stocks has a stock split or stock dividend, to generate the value of the index. At the end of 2008, the divisor stood at 0.125552709. Since the divisor is currently less than one, the value of the index is higher than the sum of the component prices.

Currently, the Dow consists of the following 30 companies:

Company

Symbol

Sector

Year Added

3M

MMM

Industrials

1976

Alcoa

AA

Materials

1959

American Express

AXP

Financials

1982

AT&T

T

Telecommunication

1999

Bank of America

BAC

Financials

2008

Boeing

BA

Industrials

1987

Caterpillar

CAT

Industrials

1991

Chevron Corp

CVX

Energy

2008

Citigroup

C

Financials

1997

Coca-Cola

KO

Consumer Staples

1987

DuPont

DD

Materials

1935

ExxonMobil

XOM

Energy

1928

General Electric

GE

Industrials

1907

General Motors

GM

Consumer Discretionary

1925

Hewlett-Packard

HPQ

Information Technology

1997

Home Depot

HD

Consumer Discretionary

1999

Intel

INTC

Information Technology

1999

IBM

IBM

Information Technology

1979

Johnson & Johnson

JNJ

Health Care

1997

JPMorgan Chase

JPM

Financials

1991

Kraft Foods

KFT

Consumer Staples

2008

McDonald’s

MCD

Consumer Discretionary

1985

Merck

MRK

Health Care

1979

Microsoft

MSFT

Information Technology

1999

Pfizer

PFE

Health Care

2004

Proctor & Gamble

PG

Consumer Staples

1932

United Technologies Corp.

UTX

Industrials

1939

Verizon Communications

VZ

Telecommunication

2004

Wal-Mart

WMT

Consumer Staples

1997

Walt Disney

DIS

Consumer Discretionary

1991

 

Interestingly, General Electric is the only component company that has remained in the index since its creation. Stay tuned for a few more tidbits about the Dow that I think you’ll find helpful in your understanding of this important index.

Sources:     www.wikipedia.com

        www.djaverage.com

 

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