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Dow Jones Industrial Average
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The Dow Jones Industrial Average is a price weighted index to track the stock performance of 30 large cap giants of the US economy. It is the second oldest US stock market index in the world and it was created by Charles Dow in 1896. It currently stands as one of the three major market indices in the US stock market, along with the Nasdaq and the S&P 500. The stocks in the DJIA are picked by the editors of the Wall Street Journal and very rarely get changed. The Dow Jones is typically considered to be a "blue chip" index.
Components of the Dow Jones Industrial Average
28 out of the 30 components of the DJIA are traded on the New York Stock Exchange, while the other two are traded on Nasdaq. The index contains stocks from various sectors such as Aerospace, Aluminum, Auto's, Banks, Entertainment, Retailers, Computer Hardware, Consumer Financials, Telecom, Home Improvement retailers, Pharmaceuticals, Restaurants, Semiconductors, Software stocks, Soft Drink Companies, and more.
The following names are in the Dow Jones Index:
| Company Name | Exchange | Ticker | Sector |
| Boeing Co. | NYSE | BA | Aerospace |
| United Technologies Corp. | NYSE | UTX | Aerospace |
| Alcoa Inc. | NYSE | AA | Aluminum |
| General Motors Corp. | NYSE | GM | Automobiles |
| Bank of America Corp. | NYSE | BAC | Banks |
| Citigroup Inc. | NYSE | C | Banks |
| JPMorgan Chase & Co. | NYSE | JPM | Banks |
| Walt Disney Co. | NYSE | DIS | Broadcasting & Entertainment |
| Wal-Mart Stores Inc. | NYSE | WMT | Broadline Retailers |
| Caterpillar Inc. | NYSE | CAT | Commercial Vehicles & Trucks |
| E.I. DuPont de Nemours & Co. | NYSE | DD | Commodity Chemicals |
| Hewlett-Packard Co. | NYSE | HPQ | Computer Hardware |
| International Business Machines Corp. | NYSE | IBM | Computer Services |
| American Express Co. | NYSE | AXP | Consumer Finance |
| 3M Co. | NYSE | MMM | Diversified Industrials |
| General Electric Co. | NYSE | GE | Diversified Industrials |
| AT&T Inc. | NYSE | T | Fixed Line Telecommunications |
| Verizon Communications Inc. | NYSE | VZ | Fixed Line Telecommunications |
| Kraft Foods Inc. Cl A | NYSE | KFT | Food Products |
| Home Depot Inc. | NYSE | HD | Home Improvement Retailers |
| Chevron Corp. | NYSE | CVX | Integrated Oil & Gas |
| Exxon Mobil Corp. | NYSE | XOM | Integrated Oil & Gas |
| Procter & Gamble Co. | NYSE | PG | Nondurable Household Products |
| Johnson & Johnson | NYSE | JNJ | Pharmaceuticals |
| Merck & Co. Inc. | NYSE | MRK | Pharmaceuticals |
| Pfizer Inc. | NYSE | PFE | Pharmaceuticals |
| McDonald's Corp. | NYSE | MCD | Restaurants & Bars |
| Intel Corp. | NASDAQ | INTC | Semiconductors |
| Coca-Cola Co. | NYSE | KO | Soft Drinks |
| Microsoft Corp. | NASDAQ | MSFT | Software |
Calculating the Dow Jones Index Price
The average is price weighted but it is calculated in a manner in which stock splits and dividends will be accounted for. These items do not fundamentally change the value of the company, yet they affect the price of the stock. Therefore, in order to calculate the index consistently, the DJIA is calculated by dividing the aggregate stock prices of the components by a Dow Divisor. The Dow Divisor maintains historical continuity of the index.
Imagine a situation where Microsoft was trading at $50 and they split their stock 2 for 1. The price of Microsoft would now be $25; however it would have two times as many shares outstanding. This stock split will reduce the dow divisor to increase the value of the DOW with the new $25 Microsoft price.
We can take it one step further. For instance, if we know that the DJIA is up 200 points today, we can back into the number of Dow points which each component was responsible for. If Microsoft (MSFT) is up 2 points on the day and the dow divisor is .15, we can say that it has accounted for 13.33 points out of the 200.
Criticism of the Dow Jones Industrial Average
There are some obvious criticisms that many will have for the Dow. First of all, it only accounts for 30 stocks. With our changing economy, different companies have emerged into the limelight and this has not been reflected into this index. Technology is the story for the last 10 years; yet, we only see 3 companies in the index which are directly tied into this sector.
The next issue, which most find troubling, is that the index is price-weighted as we have discussed above. Price weighting the index with the dow divisor does not properly account for price changes in the underlying components. This is why most of the indices are calculated using the companies' market capitalization. Let's take an example of a $20 stock and a $40 stock which both go up by 1 point. Even though both stocks exhibit differing % increases, the effect is the same as far as Dow points are concerned.
