Dow Jones Industrial Average

What is the Dow Jones Industrial Average?

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.