What Is The Dow Jones Industrial Average?
We’ve hear a lot about the Dow in the news. It goes up and folks are happy. It goes down and folks panic. But what is this mystical Dow that everyone is talking about?
The Dow actually stand for Dow Jones Industrial Average. It’s made up of the 30 largest and most widely held public companies. The average is a scaled average which is price weighted to account for stock splits. Although it only accounts for 30 companies, the Dow has historically been in line with the larger US market. For this reason it tends to be the most common indicator of the market in general.
The Dow was first published in 1896 and consisted of 12 companies:
- American Cotton Oil Company
- American Sugar Company
- American Tobacco Company
- Chicago Gas Company
- Distilling and Cattle Feeding Company
- General Electric
- Laclede Gas Light Company
- National Lead Company
- North American Company
- Tennessee Coal, Iron, and Rail company
- US Leather Company
- Unites States Rubber Company
Today’s Dow looks very different:
|Bank of America|
|Johnson & Johnson|
|Procter & Gamble|
|United Technologies Corporation|
Update – On June 8, 2009 GM and Citigroup were replaced by The Travelers Companies and Cisco Systems.
When it started the Dow averaged 40.94. It’s recent high was 14,164.53 on October 9, 2007.
Why is it so important?
Since the Dow represents 30 of the largest US companies, changes in the stock prices of the Dow can be seen to represent the general health of US companies. Higher averages mean growth and profits while lower averages represent contraction and losses.
Do you follow Dow prices? Do you think it’s an accurate economic indicator?
photo credit: epicharmus
Nice post. And I think you indirectly highlight a very important point . . .
The Dow is often considered “the market”. Typically, when someone says what did “the market” do today, they’re referring to the Dow.
But the Dow is by no means a fair representation of the actual US Stock Market. It continually amazes me that an index of 30 stocks can be equated with the broader market which is comprised of thousands of companies of all sizes.
Granted, the Wilshire 5000 (total market index) and the Dow 30 typically move in the same direction most of the time, the degree of their correlation is often much less than 1.
Thanks again for your post.
My daughters asked me this question the other day and I told them to go ask Google. LOL!
Thanks for the explanation. I won’t look like such an idiot next time I get asked. 🙂
@ Russ – It is pretty amazing that 30 companies are the usual representation of the market. I tend to look at the S&P (though still only 500 companies).
@ JMom – That’s funny. I had a comment on another post about a child asking a question and going to Google. Wow. When I grew up we had to use an encyclopedia. Amazing how things have changed!
A timely post indeed FFB!
I also favor the S&P 500, but it is amazing how 30 stocks can overwhelm an investors psyche.
ABCs of Investing says
Good stuff! I guess it could be renamed the “Down”? 🙂
@ Joe – Amazes me too how the 30 are the norm!
@ ABC’s – Ouch! It will go back up (won’t it?).