The Dow Jones Industrial Average tracks stock market trends and, by extension, economic trends in American business, thereby providing an overall indication of the status and health of the stock market and of the U.S. economy.
The Dow Jones Industrial Average (DJIA), devised by financial analyst Charles Henry
In its earliest days, the DJIA was determined by adding the prices of each of the dozen stocks in the index and dividing by twelve. On the day the index was first published, the index closed at 40.94. By 1914, the DJIA stood at 71.42, but just before World War I broke out in Europe, on July 30, 1914, the stock market closed and remained closed until December 12, 1914, when the DJIA stood at 74.56.
To more accurately reflect the state of business in the United States, the DJIA was reformulated in 1916 to include twenty representative stocks and in 1928 to include thirty stocks. Although the original means of measuring stock market activity was simple and straightforward, it soon had to be altered because, as stocks in the index split or issued stock dividends, the simple process of dividing the total value of one share of each of the stocks in the index by the number of stocks in it became misleading and inaccurate. When a stock split takes place, if the split is two-for-one, stockholders receive two shares for every share they hold. There are also occasional reverse splits in which stockholders end up with fewer shares than they originally held. In such situations, the overall value of stockholders’ positions in a stock remains unchanged, but unless provision is made for the index to reflect these splits, the index can be misleading.
The DJIA grew at a compounded annual rate of 5.3 percent during the twentieth century, reflecting the nation’s industrial growth. When the number of investment grade stocks–usually referred to as blue chips–in the DJIA was raised to thirty, a more sophisticated means of gauging their performance, called a flexible divisor, was put into use. It provides for splits and other actions that might affect the overall representativeness of the DJIA.
In the latter part of the century, huge stores of information about the stock market began to be available nearly instantaneously through the Internet. The major index averages are entered and updated every few seconds on the Internet. Stock traders who follow these indexes can buy and sell nearly immediately by communicating with their brokers through their personal computers. They can transact business from anywhere in the world as long as they have their computers up and running.
The thirty companies represented on the Dow Jones Industrial Average during the early twenty-first century are drawn from a variety of fields. Computer technology is represented by such stocks as Microsoft, Intel, United Technologies, and International Business Machines (IBM). Retail sales are reflected by holdings like Home Depot, Procter and Gamble, and Wal-Mart. Pharmaceuticals are represented by Johnson and Johnson, Merck, and Pfizer. Among the energy stocks on the index are Chevron and Exxon Mobile. Entertainment and leisure are reflected in the Dow’s holding Walt Disney and McDonald’s. Communication is represented by American Telephone and Telegraph (AT&T) and Verizon Communications.
Among the financial stocks in the DJIA are American Express, American International Group, Bank of America, Citigroup, and General Electric. There is some overlapping of categories, as for example with General Electric, which is both a manufacturing corporation and a major financial organization that is also involved in entertainment. Heavy industry is represented by Boeing and Caterpillar. As the status of industries changes, some stocks are dropped from the index and others are added so that the DJIA will be reflective of American business.
Hamilton, William Peter. “Charles Dow.” In Eyewitness to Wall Street: Four Hundred Years of Dreamers, Schemers, Busts, and Booms, by David Colbert. New York: Broadway Books, 2001. In this brief but useful essay, Hamilton outlines Dow’s approach to scoping the stock market and comments on his creating the Dow Jones Industrial and Transportation Indexes. Kindleberger, Charles Poor. Manias, Panics, and Crashes: A History of Financial Crises. New York: John Wiley & Sons, 2000. Kindleberger analyzes market trends as they are reflected by various stock market indexes. Shiller, Robert J. Irrational Exuberance. 2d ed. Princeton, N.J.: Princeton University Press, 2005. Of particular interest is Chapter 3, “Precipitating Factors: The Capitalist Explosion, the Internet, and Other Events.” Well written, clear, thorough. Soros, George. The Crisis of Global Capitalism: Open Society Endangered. New York: PublicAffairs, 1998. Provides information about the role of indexes in plotting market performance. Stevens, Leigh. Essential Technical Analysis: Tools and Techniques to Spot Market Trends. New York: John Wiley, 2002. See especially Chapter 3, “Charles Dow and the Underlying Principles of Market Behavior,” in which Dow’s method of analyzing stock market trends is discussed. Weiss, Martin D. Crash Profits: Make Money When Stocks Sink and Soar. Hoboken, N.J.: John Wiley & Sons, 2003. Weiss emphasizes the cyclical nature of stock markets and shows how the indexes that reflect them can guide investors during turbulent times.
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