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Stock Indexes > Dow Jones History |
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Dow Jones History: The Dow, Then and Now
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Charles Bergstresser,
Edward Jones (now the name of a private investment
firm) and Charles Dow founded Dow Jones & Company
in 1882, publishing an index of averages of growth
stocks in the "Customer's Afternoon Letter". At
the end of the 1800s, conquering the vast spaces
between New York and California was the nation's
challenge, and transportation was the growth
industry, so the Dow Jones Index covered
railroads, shipping and communications stocks. In
1896, Dow Jones & Co. added industrial stocks to
the average, and split their indices into
Transportation and Industrial, and renaming the
whole
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the Dow Jones industrial
Average (DJIA).
While the original corporations that made up the
DJIA included industries like lead, steel and
automobiles, you'll now find companies in
entertainment, energy and computers on the list.
If you've watched stock prices for any amount of time,
you've noticed that they may move up or down a penny or
two at a time, and it's hard to get an overall picture
of the market's history when you're looking at the
bobbing and weaving of individual stocks. The idea
behind the DJIA was that there would be a single number
that would define how well the market was doing in sort
of one fell swoop. And it was simple, when there were
eleven companies in the DJIA list: they added up the
stock prices and divided by 11, winding up with an
average stock price for the whole group.
The "Customer's Afternoon Letter" evolved into what is
now The Wall Street Journal, and the DJIA has been
reported as the big news there ever since. The 30
large-cap corporations that the index is based on are
chosen and sometimes swapped for better ones by the
editors of The Wall Street Journal, so that the DJIA
changes with the times and acts as an indicator of the
near future for stock analysts. Because the original
calculations didn't take into account potential
components like dividend yield and stock splits, the
traditional averaging method has changed in favor of
something more complicated, and hopefully a little
closer to what's actually going on in today's trickier
markets. It's called the Dow Divisor, and as of this
writing, it stands current at 0.14418073. Based on the
price of individual stocks, (it's called a
"price-weighted method, as opposed to a "market
capitalization weight), it gives the American public a
single number that describes whether the market had a
good day or a bad one.
The Dow is calculated by adding the stock prices of all
30 companies and dividing by the divisor, which is
continuously recalculated based on the activities of the
various stocks in the DJIA. When stocks split, their
value splits as well, so that if the Dow still used its
original averaging, the apparent value of companies as
well as the overall average would appear to diminish
when in fact, it has increased. The modern calculations
take into account this eventuality, so that the DJIA
stays close to reality and remains a stable indicator of
the leading corporations that make up a large part of
the stock market. When it comes to the markets,
sustainability is a vital factor in whether an index can
be trusted, and the Dow has proven itself again and
again.
If you're interested in such things, you can take a look
at the weight carried by a change in any stock within
the Dow by dividing its change in price (up or down) by
the current Dow Divisor. If, for example, Disney stock
moves up by $3, you can ascertain that Disney's change
in share price is responsible for nearly 21 points in
that day's Dow Jones Industrial Average (3/0.14418073=
20.8). (There is probably a stock market analyst
somewhere who uses this somewhat esoteric system to rate
the Dow companies in terms of impact, but if so, it's
beyond the ken of this particular article. But, it's
nice to know how things work, and the information may
prove useful to someone, somewhere).
When a particular stock hits an all time high as
Starbucks recently did, the index tracking that stock
will see a change in its overall value as well.
Depending on the size and overall value of the company,
the rise in the index will be larger or smaller than
average. So when a huge corporation makes a huge jump in
price, the index will react more strongly than when a
smaller (in capitalization) company makes a big leap.
Sustainability is always an issue when stock prices
jump: usually, the bigger the change, the bigger the
eventual adjustment downward. So, the index reports a
company's stock has hit a record high, you may make a
mental note to keep an eye on it, but you wouldn't want
to buy, because such a meteoric rise will nearly always
be followed by descent.
One criticism of the DJIA is that it gives equal weight
to the rise or fall of a share price per dollar and
share rather than taking into account the original share
price and the meaningfulness of the associated price
change for that stock. That is to say that a $1 change
in a $10 stock is a more important change than a $1
change in an $80 stock. But the criticism, while a
partial definition of the way the Dow works, isn't a
particularly strong one because the Dow does what it's
supposed to do; provides a snapshot in a single number
of the overall price health and stability of the
selected corporations in the index.
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How to stick to a household budget
and have extra
money for investing
1. Customize your budget with your current needs, wants and future goals in mind.
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