 Focus on the Stock Market
The DJIA Dow Jones Industrial Average And The Companies That Made It Great
The best known stock market index is the Dow Jones Industrial Average. Often referred to as "the Dow", the DJIA is the oldest and most watched index in the world. It is used as a measure of the entire U.S. market. When newscasters say that the market is up, they are generally referring to the Dow.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA includes large and prominent companies like General Electric, Disney, Exxon and Microsoft, in industries such as financial services, technology, retail, entertainment and consumer goods.
Birth of the Dow
The DJIA was invented by Charles Dow back in 1896. Charles Dow, editor of the Wall Street Journal and founder of Dow Jones & Company, compiled the index as a way to gauge the performance of the America’s stock market.
Charles Dow was a journalist, not a financier or a broker. Because people on Wall Street found it difficult to analyze the daily jumble of stock prices, he designed the Dow index to track whether stocks generally were rising, falling or staying even. He began with a railroad index, and then introduced the industrial average in1896. The utilities average was created in 1929. In 1970, the railroad average was renamed the transportation average. Today, Dow Jones develops, maintains, and licenses over 3,000 market indexes for investments.
The average consists of 30 of the largest and most widely held public companies in the United States. Although it’s called the Industrial Index, many of the 30 modern components have little to do with heavy industry. The Dow represents every important sector in the stock market except transportation and utilities, which have their separate indexes. Over time, these became known as the blue chip companies and were listed on the New York Stock Exchange. Now, the DJIA contains several companies that trade on the Nasdaq.
The Dow DJIA celebrated its 110-year anniversary on May 26, 2006 as the world’s most renowned market indicator.
The original companies of the Dow
It’s interesting to look back on the original 12 companies of the 1896 Dow and their fates. American Cotton Oil was absorbed in CPC International. American Sugar eventually became Amstar Holdings. American Tobacco was killed by antitrust action in 1911. Chicago Gas was absorbed by Peoples Gas. Distilling and Cattle Feeding evolved into Quantum Chemical. General Electric still survives. Laclede Gas is now Laclede Group but is not in the index. National Lead is now NL Industries but is not in the index. North American was a group of utilities broken up in 1940s. Tennessee Coal and Iron was gobbled up by U.S. Steel. U.S. Leather preferred vanished around 1952. And finally, U.S. Rubber became Uniroyal, which was in turn bought by Michelin.
The early companies of fthe Dow
Taking a nostalgic look back at the 1920’s, we see companies in the Dow like Nash Motors, Radio Corp., Victor Talking Machine, Mack Trucks, General Railway Signal, American Tobacco, Woodworth, American Can, Chrysler, Bethlehem Steel and Atlantic Refining.
Other interesting companies from the past Dow index include American Smelting, Wright Aeronautical, Goodrich, International Nickel, Texas Gulf Sulphur, American Sugar, Westinghouse Electric, Standard Oil, Texas Corp., Sears Roebuck, Allied Chemical & Dye, Atlantic Refining, Chrysler, American Can and Union Carbide. How times have changed. General Electric is the only company that has remained in the Dow from its beginning to now.
How is the DJIA calculated?
When the DJIA average was initially created, its value was calculated by simply adding up the stock prices and dividing by the number of stocks. Later, the practice of adjusting the divisor was initiated to smooth out the effects of stock splits and other corporate actions. The current divisor is 0.12482483. The number of stocks in the Dow was increased to 20 in 1916. Then the 30-stock average made its debut in 1928, and the number has remained constant ever since.
Shortcomings of the Dow
As a price-weighted average, the Dow gives higher-priced stocks more influence than the lower-priced stocks. This can produce misleading results, as a $1 increase in a lower-priced stock can be offset by a $1 decrease in a much higher-priced stock, even though the first stock experienced a larger percentage change.
To correct this problem, other indexes use stock prices weighted by market capitalization.
Some people are very upset by the way the Dow is computed. They dislike the fact that a stock split requires the Dow’s divisor to be adjusted so the new, lower stock price doesn’t distort the performance. Because a stock split changes neither the value of an investor’s position in the stock nor the company’s market value, having to change the divisor to maintain continuity is, to their way of thinking, crude and unsophisticated.
Some investors also complain that the Dow and other stock indexes should reflect the purchasing power of the stocks, rather than their dollar prices. Thye would like to adjust the indexes by the Consumer Price Index each year, so that the value of the index would be expressed in constant purchasing power, that is, uninflated, dollars.
Remarkably, the DJIA is in sync with other major market barometers like the S&P500, even though it uses only 30 stocks and is computed without considering the market capitalization of a company.
Composition of the Dow
At present the Dow Jones Industrial Average consists of the following 30 companies:
3M Co. NYSE: MMM congmerates, manufacturing
ALCOA Inc. NYSE: AA aluminum
Altria Group Inc. NYSE: MO tobacco, foods
American Express Co. NYSE: AXP credit services
American International Group Inc. NYSE: AIG property & casualty insurance
AT&T Inc. NYSE: T telecoms
Boeing Co. NYSE: BA aerospace/defense
Caterpillar Inc. NYSE: CAT farm & construction equipment
Citigroup Inc. NYSE: C money center banks
Coca-Cola Co. NYSE: KO beverages
E.I. du Pont de Nemours & Co. NYSE: DD chemicals
Exxon Mobil Corp. NYSE: XOM major integrated oil & gas
General Electric Co. NYSE: GE conglomerates, media
General Motors Corp. NYSE: GM auto manufacturers
Hewlett-Packard Co. NYSE: HPQ diversified computer systems
Home Depot Inc. NYSE: HD home improvement stores
Honeywell International Inc. NYSE: HON conglomerates
Intel Corp. NASDAQ: INTC semiconductors
International Business Machines Corp. NYSE: IBM diversified computer systems
Johnson & Johnson NYSE: JNJ consumer and health care products conglomerate
JPMorgan Chase & Co. NYSE: JPM money center banks
McDonald's Corp. NYSE: MCD restaurant franchise
Merck & Co. Inc. NYSE: MRK drug manufacturers
Microsoft Corp. NASDAQ: MSFT software
Pfizer Inc. NYSE: PFE drug manufacturers
Procter & Gamble Co. NYSE: PG consumer goods
United Technologies Corp. NYSE: UTX conglomerates
Verizon Communications Inc. NYSE: VZ telecommunications
Wal-Mart Stores Inc. NYSE: WMT discount, variety stores
Walt Disney Co. NYSE: DIS entertainment
Recent Changes in the Dow companies
On March 17, 1997, Hewlett-Packard, Johnson & Johnson, Travelers Group, and Wal-Mart joined the average, replacing Bethlehem Steel, Texaco, Westinghouse Electric and Woolworth.
In 1998, Travelers Group merged with CitiBank, and the new entity CitiGroup replaced the Travelers Group.
On November 1, 1999, Home Depot, Intel, Microsoft, and SBC Communications joined the average, replacing Union Carbide, Goodyear Tire & Rubber, Sears, and Chevron.
Between 1999 and 2004, several stocks in the index merged and/or changed names. Exxon became Exxon-Mobil after their merger. Allied-Signal merged with Honeywell and kept the Honeywell name. JP Morgan became JP Morgan Chase after their merger. Minnesota Mining and Manufacturing officially became 3M Corp; and Philip Morris renamed itself Altria.
On April 8, 2004, American International Group, Pfizer, and Verizon joined the average, replacing AT&T, Eastman Kodak, and International Paper.
How can I invest in the Dow?
There is an interesting investing strategy, called the Dogs of the Dow. It suggests that nvestors buy just those Dow stocks which did poorly the previous year, on the expectation that they will recover and outperform the others.
Apart from investing in the individual stocks in the Dow Jones, the investor can buy index mutual funds which own a basket of the Dow stocks. These are passively managed funds with low expenses whose price performance mirrors the Dow index. Index mutual funds make sense for some investors with a long-term outlook who know that anywhere from 50% to 80% of other managed mutual funds fail to beat the market.
Another investment possibility is an exchange-traded fund (ETF) which represents ownership in a balanced portfolio of the equity securities that comprise the DJIA. This ETF, called the Diamonds, trades on the Amex with ticker symbol DIA. The Diamonds ETF tracks the Dow index and is an easy way to invest in the Dow. All ETFs trade like any other stock, so they can be bought on margin, sold short or held for the long term.
In addition, Dow futures and option contracts trade actively on the Chicago Board of Trade (CBOT).
I hope these investment tips bring you much success. I wish you a very happy day.
----- Surfer Sam
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