The Dow Jones Average

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The Dow Jones Average

The Dow Jones Average is the most highly accepted and regarded index in existence. Its inception more than 100 years ago in 1884 confirms its credential as the market's longest-running index. This index is more than simply prestigious; because of its unparalleled run, the Dow has amassed market data unequalled by any competing index. This data enables the Dow to continue to make further depictions with success rates much higher than those of the competition. For these reasons, the Dow's depiction of the state of the American markets is almost absolute.

Plain English

The most prestigious of all the indices, the Dow Jones Average is a series of four separate indices composed of stock currently trading on the New York Stock Exchange. It is considered to best represent the activity of the market and the U.S. economy.


Charles Dow, founder of The Wall Street Journal, created the Dow Jones Average in 1884. His initial list of 11 stocks has since grown to 65 companies subdivided into four categories as follows :

  • The Industrial Average lists blue chip stocks of 30 companies in industries ranging from computer technology such as IBM, to raw steel manufacturers such as Bethlehem Steel .

  • The Utility Average lists the stocks of 15 power-producing companies, such as Consolidated Edison (Con-Ed) for electricity, and Consolidated Natural Gas for gas.

  • The Transportation Average lists stocks in 15 transportation-based companies ranging from airlines, such as TWA, to move-it-yourself truck rental companies, such as Ryder.

  • The Composite Average lists the average of the combined 65 stocks listed by the other three averages.

The most commonly used of these averages is the Dow Jones Industrial Average. Remember, however, that this is but one portion of the whole Dow Jones average. These 30 stocks, all traded on the floor of the New York Stock Exchange, have been chosen by the editors of The Wall Street Journal because they are thought to accurately reflect the state of the American markets. Because of the sheer number of types of industries represented on the stock exchange, however, many critics believe that an index of 30 stocks cannot possibly depict the state of the American markets accurately.

In addition to industry representation issues, the stocks on the Industrial Average receive criticism for being exclusively blue chip stocks. Critics of the index believe this exclusivity also limits its ability to effectively represent the different responses of various types of stock to the same stimuli.

One of the methods employed by the Dow to nullify some of the extenuating market circumstances in its averages is the use of a divisor. In a proper average, the number of entrant figures is the same number as the one used to divide the total sum. In the case of the Dow and many other indices, however, this number has been adjusted to (hopefully) provide a more accurate average.

The divisors used to calculate the Dow Jones Average appear daily as a footnote to the Dow Jones Averages tables on the stock pages. The four averages used to compile the Dow are

The Industrial Average .18238596
The Utility Average 1.8618942
The Transportation Average .20890294
The Composite Average 1.0127139

Also included in the Dow Jones Averages tables is the position of the Dow during the last five business days as well as the last two years.

Anyone looking at the Dow today will find it rising and falling within the 10,000 to 11,000 range, and it is safe to assume that the average price of a stock listed on this index is nowhere in this range. This is because the Dow is not reporting in dollars and cents , but in points. These points constitute a scale that is used for measuring the market rather than actual prices.

Furthermore, as the world of trading evolves and expands, the Dow has found itself ill equipped to adjust for the influences of trading in other countries on American markets. In response, the Dow has created the World Index, a new measurement to account for the ramifications of global trading. This new index, in addition to attempting more-accurate worldwide reporting, demonstrates the Dow's willingness to make inherent changes to the infrastructure of its averages in order to incorporate new data and changing market conditions.

Despite its inherent flaws and criticisms, no index is more closely followed or has such an established position in the American marketplace than the Dow.

A stock's position on any of the Dow Averages is never assured. The editors of The Wall Street Journal change the stocks periodically to ensure that the selected stocks still best represent their corresponding markets. The stocks listed in each average appear regularly in the financial pages. Currently, the 30 stocks listed on the Industrial Average are the following:

  • AT&T

  • Honeywell

  • Alcoa

  • Intel

  • American Express

  • IBM

  • Boeing

  • International Paper

  • Caterpillar

  • Johnson & Johnson

  • Citigroup

  • McDonald's

  • Coca-Cola

  • Merck

  • Disney

  • Microsoft

  • DuPont

  • Minnesota Manufacturing and Mining

  • Eastman Kodak

  • J.P. Morgan

  • ExxonMobil

  • Phillip Morris

  • General Electric

  • Proctor & Gamble

  • General Motors

  • SBC Communciations

  • Hewlett-Packard

  • United Technologies

  • Home Depot

  • Wal-Mart

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Stock Market Investing 10 Minute Guide
Stock Market Investing 10 Minute Guide
ISBN: 0028636104
EAN: 2147483647
Year: 2000
Pages: 130
Authors: Alex Saenz

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