Market Beat: What is the Dow Jones Industrial Average?
One of the most common questions that I hear as an adviser is, andamp;#8220;What is the Dow Jones Industrial Average, and why does it have the value that is has?andamp;#8221; Today, the value of the Dow is just over 13,000. The Dow was created in 1896 by Charles Dow, who was the editor of the Wall Street Journal at the time. It consists of 30 stocks that are leaders in their respective industries and is diversified among several different sectors or industrial groups. When the average was created, the math to come up with the value was very simple. You would add up the total price of the 30 stocks and then divide the resulting number by 30 to get an average price and hence obtain the value of the Dow Jones Industrial Average. So, you may ask, if you add up the total price of 30 stocks and divide by 30, how do you get to 13,000? The average price of those stocks can’t be anywhere near $13,000 each.The answer is that the divisor is not 30 anymore, like when the average started. Every time a stock either splits or pays a stock dividend, the divisor has to be adjusted accordingly. So, today, instead of dividing by 30, we are now dividing the total value of the 30 stocks by 0.13212943. Since the divisor is less than one, the value of the Dow is higher than the average price of the 30 stocks that make it up.The stocks that are in the Dow also have changed over time. If a stock is no longer an industry leader it may get replaced. Today the Dow consists of 3M, Alcoa, American Express, ATandamp;T, Bank of America, Boeing, Caterpillar, Chevron, Cisco, Coca-Cola, DuPont, ExxonMobil, General Electric, Hewlett Packard, Home Depot, Intel, IBM, Johnson andamp; Johnson, JP Morgan Chase, Kraft Foods, McDonald’s, Merck, Microsoft, Pfizer, Procter andamp; Gamble, Travelers, United Technologies, Verizon, Wal-Mart, and Walt Disney.As you can see, all of those companies are household names and are spread out across the different industry groups. Even though the original name is the Dow Jones Industrial Average, the components today are not just heavy industry and include health care, technology, retail, entertainment, energy, financials, etc. While it’s not possible to invest directly in the Dow, there are funds that consist of the Dow stocks.Kenneth Roberts is a Truckee based Registered Investment Advisor. Information on his money management service can be found at http://www.fusiontargetretirement.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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